ACV (Actual Cash Value) is the sum of money equal to the cost of replacing the asset less its depreciation as a damaged or stolen asset at the time of the loss. The actual value for which an asset could be sold is therefore less than what it would cost to replace it.
Simply speaking, the actual cash value (ACV) is the value of an item after its depreciation has been subtracted from the current market cost of a similar item. Insurance providers calculate the item's depreciation by determining first the item's useful life and then how much useful life the object has left.
Let's say your two-year-old laptop is stolen and you have an actual cash value property insurance policy. Two years ago, the laptop cost $2,000, but today a similar laptop costs $2,500. Your insurance provider determines that the useful life of a laptop is five years, which means the stolen laptop had 60% of its useful life left. The ACV equals $2,500 (the replacement cost) times 60%, or $2,000.
It may make sense to insure your property at its actual cash value if: You can quickly find acceptable used replacements for your items. You want to save some money on your property insurance premiums. However, a replacement value policy (which replaces the item at the current market price of a similar item) may be more effective if you’ve invested a lot of money in your property or you use highly specialized equipment. Though the premiums are usually higher than ACV policies, the bigger payout may make it easier for you to find replacement items faster. Lastly, if you have leased equipment, you may not have the option of insuring it at its actual cash value – just its replacement value.
Of course, if you have questions about which property insurance option is a better fit for your business, be sure to talk to your insurance agent.