What does "actual cash value" refer to in insurance terms?

Actual cash value (ACV) is defined as the cost to replace an item minus depreciation. This means that when an insurance policy states it will cover the actual cash value of an asset, it takes into account the item’s current market value, which reflects its replacement cost adjusted for depreciation.

Depreciation accounts for the wear and tear, age, and condition of the item, essentially providing a more accurate financial representation of what the item is worth at the time of loss. This method contrasts with other valuation methods, such as replacement cost, which would cover the full cost of replacing the item without considering depreciation. Therefore, when homeowners or businesses claim for losses, they can expect compensation that reflects the current value of the asset after subtracting its depreciation, making actual cash value a commonly used term in property insurance.