What is the actual cash value in property insurance?

The concept of actual cash value (ACV) in property insurance refers to the method of valuing property that accounts for both the replacement cost of the item and its depreciation over time. The correct answer, which identifies actual cash value as "replacement cost minus depreciation," accurately reflects how insurers assess the value of property at the time of a loss.

ACV recognizes that as property ages, its value diminishes due to wear and tear, obsolescence, or market factors. Therefore, when an insured property is damaged or lost, the insurance payout is based on the cost it would take to replace the property with a new one, less the amount of depreciation that has accumulated since the original purchase.

This method helps ensure that the insured receives a fair settlement that considers the current value of the property rather than its original cost or its potential future value. Thus, ACV provides a more realistic picture of worth in the context of a claim, supporting the principle of indemnity, which aims to restore the insured party to their pre-loss financial position without allowing for profit from an insurance claim.