Actual Cash Value

What Is Actual Cash Value?

The actual cash value (ACV) of a damaged or stolen property at the time of loss is the amount equal to the replacement cost minus depreciation. The actual market value of the property, which is always less than the cost of replacing it.

How Actual Cash Value Works

Actual cash value is sometimes used by insurance companies to determine the amount to be paid to a policyholder following loss or damage to the insured property or vehicle. There is no such thing as ACV insurance, for example; this is a common misconception.

In the case of a totaled automobile, for example, the insurance company would typically pay the vehicle's actual cash value after calculating its replacement cost and deducting factors such as depreciation and wear and tear. The insurer would pay the amount required to replace the covered item with a like-kind new one under replacement-cost coverage.

In the property and casualty insurance industry, actual cash value is used to determine the value of insured property.

Actual cash value is calculated by subtracting depreciation from replacement cost, whereas depreciation is calculated by determining an item's expected lifetime and determining what percentage of that lifetime remains. The actual cash value is calculated by multiplying this percentage by the replacement cost.

Example of Actual Cash Value

As an example, a man paid $3,000 for a television set that was destroyed in a hurricane five years ago. According to his insurance company, all televisions have a useful life of ten years. Today, a comparable television costs $3,500. The destroyed television still had 50% (five years) of its life left in it. The actual cash value is $3,500 (replacement cost) multiplied by 50% (useful life remaining), or $1,750.

This is not the same as the book value that accountants use in financial statements or for tax purposes. Accountants value an item on a balance sheet by taking the purchase price and subtracting the accumulated depreciation. ACV is calculated using the current replacement cost of a new item.

Actual Cash Value vs. Replacement Cost

Property insurance policyholders prefer payment based on the replacement cost of damaged or stolen property because it compensates the policyholder for the actual cost of replacing property.

For example, if your camera is stolen, a replacement cost policy will reimburse you for the full cost of replacing it with a new camera of the same type. The insurer will not consider the fact that the lost camera had a shutter count of 25,000 because you used it every day for the last two years, causing significant wear and tear.