How is actual cash value (ACV) primarily determined?

Actual cash value (ACV) is primarily determined as the cost to repair minus depreciation or the fair market value of the property at the time of the loss. This method is used in insurance to establish how much a policyholder might receive in the event of a claim, reflecting the property’s worth while accounting for factors such as wear and tear.

When calculating ACV, the concept of depreciation is integral because it considers the reduction in value over time due to age or obsolescence. By assessing either the cost to repair the property and then deducting depreciation, or evaluating the fair market value, insurers aim to provide a payout that represents the asset's current economic value rather than its original cost or replacement cost.

This approach ensures that the insured is compensated fairly while preventing overinsurance and safeguarding the insurer against excessive claims. The emphasis on fair market value combined with depreciation reflects a balance between providing sufficient compensation for the insured and maintaining actuarial sustainability for the insurance provider.