Reviewed by Daniel Mirkovic
Updated February 22, 2024
ac·tu·al cash val·ue | ˈak(t)SH(o͞o)əl ‘kaSH ˈvalyo͞o
Definition: The depreciated replacement cost of damaged or stolen property at the time of loss.
Robert’s insurance company awarded him the actual cash value for his furniture that was destroyed in the fire.
Actual cash value (often abbreviated: ACV) is one of the ways an insurance company will determine how much money to pay out when they settle a claim. Actual cash value is a calculation of how much money something is worth, taking into consideration the item’s age and condition.
Think of it as the value of an item if you were to find it at a garage sale.
Sandra bought her couch brand-new from the local furniture store eight years ago for $500. She’s moving soon, and she hopes to sell the couch in a garage sale. She’d love to get $500 back for it, but she knows that’s not even remotely realistic.
A couch may be worth $500 brand-new, but you’d never expect to pay that for the same couch after it’s been used for 8 years. The amount that Sandra actually gets from selling the couch is like the actual cash value.
Rather than determining actual cash value willy-nilly the way one might at a garage sale, insurers use depreciation to calculate it. Depreciation is an accounting method that spreads the value of an item over its expected lifetime.
That is to say, if Sandra wanted to depreciate the value of her couch, she’d first decide what the couch’s life expectancy was. Let’s say she decides that 10 years is a reasonable life expectancy for a couch.
Sandra’s couch is 8 years old, so it’s lived through 8/10 of its expected life, or 80%; it’s been 80% depreciated. The couch now has 20% of its life left. To calculate the actual cash value, Sandra multiplies the couch’s original value by the percentage of its life remaining:
$500 x 20% = $100
Thus, based on her depreciation calculation, Sandra could ask $100 for her couch at the garage sale. That’s her determination of the actual cash value . It’s a simplified version of the way that insurance companies calculate Actual Cash Value.
When they’re figuring out Actual Cash Value, insurance companies add one more step to the process. Insurers don’t base their calculation on the original purchase price of an item; they’ll use the replacement cost.
Replacement cost is the amount of money one would pay to replace an item with a new one of similar kind and quality (or to repair it, whichever costs less). That sounds like a small difference, but it’s very important.
After selling her couch at the garage sale and moving, Sandra needs to buy a new one. She really liked her old couch, so she heads to the furniture store to scope out a new one. She’s shocked to see that similar couches are now worth $700!
In this case, the replacement cost of Sandra’s couch is $700, even though she only paid $500 originally. When property is insured for its replacement cost, insurers are committing to replace lost or damaged items with new ones. They don’t expect people to travel back in time to buy new items at the historical cost. They also don’t expect people to replace their damaged items with inferior versions. This is what’s meant by replacement cost.
So, if an insurer was calculating the actual cash value of Sandra’s old couch, they’d do it a little differently than she did. They’d first determine what it would cost for Sandra to buy a new, similar couch: $700. Then, they’d determine what the expected life of that couch is. Insurers have standards that they use when determining the useful lives of various types of property. In this case, the insurer agrees with Sandra: a couch should last 10 years.
With those numbers in mind, here’s the calculation the insurer would use for Sandra’s old couch:
$700 x 20% = $140
(replacement cost) x (percentage of expected life remaining) = (actual cash value)
The insurer determines that the actual cash value of Sandra’s couch is $140. If Sandra had lost her couch in a fire before she could sell it, her insurer would have paid her $140 on an actual cash value basis. The only difference between Sandra’s $100 valuation and the insurer’s $140 valuation was original value vs. replacement cost. So you can see, replacement cost is an important concept in insurance.
Finally, keep in mind that the condition of the item is still relevant. Even if Sandra’s couch might have theoretically had a few years left, if it was already in terrible condition before the loss (completely destroyed by the dogs, stained with food, and bashed in from a rough move), then its ACV would be lower.
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Most home insurers provide property coverage on a replacement cost basis. This means that they don’t factor in depreciation when deciding how much to pay out for a claim, as long as the customer actually repairs or replaces the item. However, there are cases where an insurer will opt for an actual cash value settlement instead of a replacement cost settlement. For example, let’s say an insured decides not to replace their lost property, and instead asks the insurer for a cash payout. In this case, the insurer would apply depreciation before paying out the cash settlement.
$1,200 x 20% = $240
(replacement cost) x (percentage of expected life remaining) = (actual cash value)
One day, Sandra’s new home is broken into, and a bunch of her stuff is stolen. Her insurer will cover the cost of replacing the stolen property, minus her deductible. However, since her new place is smaller than her old one, she decides that she doesn’t want to replace the television that was stolen; she usually watches movies on her laptop these days anyway. Sandra asks her insurer for a cash settlement for the TV’s actual cash value.
A new, similar TV would cost Sandra $1,200 (the replacement cost), and her TV was four years old. Her insurer has determined that a TV’s expected lifetime is five years. Sandra’s TV had one year, or 20%, of its expected life left, so the depreciated actual cash value would be $240.
In Square One’s case, we use what’s called limited depreciation. If an insured chooses not to replace their lost or damaged stuff, we can often provide them with a limited depreciation settlement. That means we’ll deduct no more than 50% of an item’s replacement cost for depreciation. That often means a greater payout than other policies that always apply full depreciation.
We’ve been talking about home insurance so far, but actual cash value has major importance in the world of car insurance, too.
When a vehicle gets damaged and the owner makes an insurance claim, the settlement will be the cost of repairing the vehicle (assuming the damage is covered). However, car insurance will only pay for repairs up to the vehicle’s cash value. If the repairs will cost more than the car is worth, it’s known as a total loss. In this case, the insurance company will offer a cash settlement based on the vehicle’s actual cash value instead of paying for repairs.
Vehicle cash value is the same as any other cash value: it’s the approximate price a vehicle would fetch if sold. Each insurance provider has their own method for calculating the ACV of a vehicle, but generally it involves looking at recent listings and sales of similar vehicles in the area.
In some cases, you can get an endorsement that provides coverage for a vehicle on a replacement cost basis instead. This is particularly helpful for new vehicles that the owner has financed. Brand-new cars often have a cash value that’s less than the outstanding loan amount, which means the owner would still owe money on the car even after a cash value settlement for a total loss.
Actual cash value is the monetary worth of an item, which factors in the item’s age and condition.
It is determined by calculating the cost of replacing the item then subtracting the amount the item’s value has depreciated during its lifetime.
Insurers will use actual cash value to decide how much to pay when an insured chooses not to replace lost or damaged items, and chooses a cash settlement instead.
Car insurance policies cover repairs costing up to the vehicle’s cash value. Repair costs in excess of this amount result in a total loss and cash settlement.
Looking for another insurance definition? Look it up in The Insurance Glossary, home to dozens of easy-to-follow definitions for the most common insurance terms. Or, get an online quote in under 5 minutes and find out how affordable personalized home insurance can be.
About the expert: Daniel Mirkovic
A co-founder of Square One with 25 years of experience in the insurance industry, Daniel was previously vice president of the insurance and travel divisions at the British Columbia Automobile Association. Daniel has a bachelor of commerce and a Master of Business Administration (MBA) from the Sauder School of Business at the University of British Columbia. He holds a Canadian Accredited Insurance Broker (CAIB) designation and a general insurance license level 3 in BC, Alberta, Saskatchewan, Manitoba and Ontario.
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