If you’ve ever had to make a claim for a lost or damaged item, you may have wondered how your home insurance company determined the amount you received. There are a couple of ways insurers go about calculating your claim amount – one of which is known as Actual Cash Value (ACV).
ACV refers to the cost of replacing a lost or damaged item that’s in similar condition to yours at the time of loss. That means that the amount you’d receive would be equal to however much the item is worth today. ACV takes into consideration wear-and-tear over time which can decrease the item’s value.
Here’s an example to help you get a better understanding of ACV.
Let’s say your expensive Italian leather couch was damaged by flooding. You bought it new 10 years ago for $14,000 (it’s a really, really, really nice couch!). It’s a family room staple that’s used every day and while you’ve taken pretty good care of it over the years, it’s clearly been well used. If you decide you’re not going to replace or repair your couch, and instead just want cash for it, here’s what will happen:
You submit a claim to your insurance company, and they determine that to replace your sofa with one that was in the same condition as yours at the time it was damaged would cost $1,500. As a result, you’d get $1,500 for your couch.
How did they arrive at this amount?
Most insurers use “depreciation tables” which provide standard guidelines on what certain items are worth over time. Depending on the item, they might also contact a professional appraiser or retailer with expertise in that particular area.
What’s the difference between actual cash value and actual replacement cost?
Actual Replacement Cost is different from ACV in that, if you have a claim and want to replace or repair your lost or damaged item, the cost of depreciation (wear and tear) isn’t deducted from its original value. Your claim settlement amount will be the cost to repair or replace the lost or damaged property with new materials of similar kind, quality, and usefulness.
Let’s go back to our expensive leather couch example.
If you decide to replace or repair your prized possession, you’ll be reimbursed for a brand-new couch that is highly similar to your damaged one and is available on the market today.
Be sure to check your home insurance policy to see what your actual cash value options are when it comes to making a claim.