Actual Cash Value (ACV) refers to the current value of an item or property, calculated as the replacement cost of that item minus depreciation and obsolescence. In insurance terms, it represents the amount an insurer will pay to replace or repair damaged or destroyed property at the time of loss, taking into account age, wear and tear, and reduced functionality.
Formula:
ACV = Replacement Cost – Depreciation
Key Components:
- Replacement Cost: Cost of buying a new, similar item.
- Depreciation: Reduction in value over time due to usage, age, or market changes.
- Obsolescence: When an item becomes outdated or less useful due to newer technologies or standards.
Example:
If a 5-year-old laptop originally worth ₹60,000 is damaged in a fire, and its depreciation over five years is ₹30,000, then:
ACV = ₹60,000 – ₹30,000 = ₹30,000
That’s the amount the insurer would pay under an ACV policy.
Why It Matters:
- Cost-Efficient Premiums: Policies offering ACV typically have lower premiums compared to those with full replacement cost.
- Realistic Settlements: ACV provides a fair settlement based on the item’s present value, not its original purchase price.
- Common in Property Insurance: Especially used in homeowners insurance, commercial property, and auto insurance policies.
Important Notes:
- Not equal to market value: ACV is based on replacement cost minus depreciation, not the current market price or resale value.
- Subject to policy terms: The way depreciation is calculated may vary across insurers.
- Replacement cost coverage: Some policies allow upgrades to Replacement Cost Value (RCV) coverage for an additional premium.
