Personal Insurance 101: Actual Cash Value – what does it mean?

The insurance industry does itself no favors in terms of being clear, concise and unambiguous (contrary to what the law says).  If you’ve ever attempted to read your insurance policy forms – you know exactly what I’m talking about.  This is where soliciting the advice of an educated, insurance professional is recommended – because it’s our job to decipher it for you and explain it in an understandable way!  It also helps clients and consumers understand how  potential claims may be settled ahead of time.

Automobile insurance policies are traditionally settled on an actual cash value basis.  This is contrary to standard homeowners policies which settle damage to the building on a replacement cost  basis.  What’s the difference?  Actual cash value (commonly referred to as ACV) is calculated by determining an item’s original value and subtracting the amount of depreciation it has incurred.  Replacement cost is calculated by determining the amount necessary to replace an item with a new one.


Replacement Cost:

We’ll explain replacement cost in detail in our next blog post (I can’t hardly wait, can you!?).  However, here is a quick example:  you own a home that was built 10 years ago.  A horrific fire destroys your entire home (no one was injured!).  Your homeowners policy will provide coverage for this loss and pay to replace the damaged home with a new home (including cost of materials and cost of labor) after you pay your deductible.  The important distinction to make is that there is no reduction in the payout for depreciation.

Actual Cash Value:

You’re driving down the highway on a fall night in Wisconsin and BAM! – you hit a deer and total your 8 year old vehicle.  You consequently file a claim with the insurance company and find out that the loss is covered as long as you carry comprehensive coverage.  The insurance company will pay for the car that you have now – not the one you had 8 years ago.  They’ll take the original cost of your vehicle, subtract 8 years worth of depreciation, and provide you a check for that amount (less your deductible).  This, in its simplest form, is an example of an actual cash value loss settlement.  We’ll explain some finer details in a later post – for example, if you lease a vehicle and you owe more on the lease than what the vehicle is worth.

Congratulations!  You’re now an educated consumer! As the spring rolls on, we’ll continue to try and define many common policy terms.  As always, ‘knowledge is power’.