How is the 'actual cash value' calculated?

Actual cash value (ACV) is determined by taking the replacement cost of the property and subtracting depreciation. This method reflects the current value of the property by considering not just what it would cost to replace it, but also how much value has been lost over time due to factors such as wear and tear, age, and obsolescence.

Using this calculation allows for a more accurate representation of the property's worth at the time of loss, reflecting its depreciated value rather than its full replacement cost, which may not be relevant if the property is older or has lost functional utility. For example, if a new roof costs $10,000 to replace but has been on the house for five years, its actual cash value would consider how much value it has lost during that time due to depreciation.

In contrast, other options do not accurately capture the definition of actual cash value. Merely taking the replacement cost or accounting for inflation does not consider depreciation, leading to inflated assessments of value. Subtracting the original purchase price from current market value does not consider how much the property has depreciated over the years, making it an inaccurate representation of ACV.