Actual Cash Value

Actual Cash Value is the depreciated value of an item of property at the time of the loss. This type of settlement does not allow you to replace what you have lost. Instead, it compensates you for the value of an item as if were being sold at a garage sale. Think of actual cash value as the replacement cost of an item after depreciation is taken into account. In fact, actual cash value is simply replacement cost minus depreciation. So how does it work? Let's look at actual cash value with a few examples.

Claim Scenario #1:  Your home and furnishings were destroyed during a recent wildfire. You made a claim to your insurance company and have met your deductible. Now you want to replace the damaged furnishings. Last year, you bought a sofa for $2,000.

• If you have replacement cost coverage, the company might pay you $2,100 because that is what it would cost to buy a similar sofa using today's prices.
• If you have actual cash value coverage, the company might pay you only $1,500 because that is the actual cash value of the soda today after taking wear and tear into account.

Claim Scenario #2: Suppose you have an eight-year old air conditioning compressor that is damaged by lightning and needs to be replaced. The average life span of an air compressor is 16 years. You made a claim to your insurance company and have met your deductible. Eight years ago you paid $4,000, but now it costs $6,000.

• If you have replacement cost coverage, the insurance company would base the claim payment on the $6,000 cost. 
• If you have actual cash value coverage, you might only get $3,000. The compressor  is eight years old, so it has 50% of its life left. The actual cash value would be 50% of the $6,000 cost click or $3,000.