In terms of property insurance, what does the term “actual cash value” mean?

The term "actual cash value" (ACV) is defined as the replacement cost of the property minus depreciation. This measurement reflects the value of the property at the time of a loss and considers the wear and tear or obsolescence that has occurred since the property was originally purchased.

In essence, ACV aims to provide an equitable settlement that accounts for the current worth of the property rather than its original purchase price or replacement cost. This approach means that if a policyholder suffers a loss, they can receive compensation that accurately reflects both the condition of the property at the time of the incident and what it would cost to replace it now, factoring in depreciation.

Other definitions, like the original purchase value or the market value at the time of loss, do not accurately encapsulate the concept of ACV. The original purchase value does not account for depreciation, while market value can vary based on external conditions that may not reflect the actual wear and tear of the property itself. Similarly, adding appreciation to replacement cost does not align with the actual cash value principle, as appreciation typically relates to increased value over time rather than the tangible loss experienced by the insured.