Actual cash value

How it works

Actual cash value is one of the two common ways a property policy puts a number on a loss. The other is replacement costReplacement costReplacement cost is a way of valuing property losses that pays to repair or replace damaged items with new ones of like kind and quality, without subtracting depreciation.Read the definition, which is what it would cost to buy a new, similar item at today’s prices. ACV starts from that same figure and subtracts depreciation: the value the item lost through age, use and wear.

The older the item, the wider the gap between what you’d spend to replace it and what an ACV policy pays. Your deductibleDeductibleA deductible is the amount you pay toward a covered loss before your insurance pays, usually subtracted from the claim payment.Read the definition then comes off the ACV amount, and the payment can’t exceed your limit.

Depreciation is an estimate, not a fixed table. Adjusters typically look at how old the item was, how long that kind of item usually lasts and the condition it was in, so the method your policy and insurer use matters.

Example

Why it matters for a small business

After a fire or theft, you have to buy new equipment, not five-year-old equipment. ACV can leave a gap you’d need to cover from cash at exactly the moment the business is under strain. Choosing ACV can lower what you pay for a policy, but that trade-off shows up at claim time.

You’ll find the valuation method in your property coverage, often noted on the declarations pageDeclarations pageThe declarations page is the summary at the front of an insurance policy listing who’s insured, what’s covered, the limits, deductibles, premium and policy dates.Read the definition or in the coverage form. A policy can value some property at replacement cost and other property at ACV. Many replacement cost policies also pay the ACV first and the rest once you’ve actually repaired or replaced the item, subject to the policy’s terms.

If most of what you own is older equipment, ask how each type of property is valued before you buy commercial property insurance.