What does "actual cash value" (ACV) mean in property insurance?

"Actual cash value" (ACV) in property insurance refers to the value of insured property at the time of loss, taking into account its condition and depreciation. This means that when an insurance claim is made, the insurer calculates the ACV by determining the replacement cost of the property and then subtracting any depreciation that may have occurred since the property was purchased.

Understanding the concept of ACV is crucial because it reflects the fair market value of the property rather than the amount originally paid for it or the cost of replacing it with a brand-new item. For instance, if a homeowner has a roof that was originally worth $20,000 but is now several years old and has deteriorated, the insurer will determine its current market value after accounting for the depreciation, leading to a lower payout amount than if only the replacement cost were considered.

This distinction helps policyholders recognize what they will actually receive in the event of a covered loss and encourages them to maintain their property in good condition to minimize depreciation over time.