What does "Actual Cash Value" account for in an insurance context?

"Actual Cash Value" (ACV) is a key concept in personal lines insurance, particularly in how losses are evaluated and claims are settled. ACV takes into account the current worth of an asset by factoring in depreciation. This means that when an insured property is damaged or destroyed, the insurer typically assesses how much the property was worth at the time of the loss. To arrive at this value, the replacement cost of the item is calculated, and then any depreciation is deducted to reflect the decrease in value over time due to wear and tear, age, or obsolescence.

For example, if a homeowner has a roof that is estimated to cost $10,000 to replace but is 10 years old, the insurer might determine that its actual cash value is less than $10,000 after accounting for depreciation. Thus, the amount the insurer pays out in the event of a claim would be based on this ACV figure, rather than the original purchase price, the current market value, or the total insured value of the policy, which may not accurately reflect the item's worth at the time of loss.