Actual Cash Value

In the realm of property insurance is the issue of valuation. How much is something worth, and how much will the insurance company pay for a covered loss to that property?

Two primary insurance valuation methods – replacement cost and actual cash value.

Replacement cost is the – wait for it – cost to replace an item new.

Actual cash value is usually defined as replacement cost minus depreciation.

Depreciation in this case is not accounting depreciation. The adjuster will look at the useful life and condition of the property to come up with a depreciation factor. There is no rule or concrete calculation. It is largely a negotiated factor. Some states require that market value be included in the calculation.

All this should be utterly unimportant to most of you reading this as you SHOULD have replacement cost coverage. For most insureds, the desire after a claim would be to replace the item. If so, buy replacement cost insurance and avoid actual cash value.