What is actual cost value?

Actual cost value (ACV) insurance is a method of calculating the value of your property when it becomes physically damaged or lost. There are a few ways that insurers calculate the amount of money they’ll pay for your damage claim. 

As we've mentioned before, "with an actual cost value policy, you aren’t as well protected as a replacement value policy." You will be saving some money, however, because the insurers are factoring in depreciation should you file a claim.

Calculation based on repair or replacement, minus depreciation

Let’s say your stovetop gets torched in a grease fire, and you want it replaced. The cost of a decent new stove is around $700. Since you bought your stove ten years ago at a price of $800, you might expect that same reimbursement. However, this is not replacement value insurance.

The insurer values your older stove at $600 today, a depreciation of $200. Since they calculate your payout based on the “actual value” cost to replace your now used item,  you’ll only be reimbursed $600 after you’ve bought that new $700 replacement stove, leaving you $100 out of pocket.  

Calculation based on “fair market” value

In California for example, an appellate court agreed that ACV could be defined as “fair market value” in the 1998 case of Cheeks v. California Fair Plan. Keep in mind this took place twenty years ago, and policies have updated since.

Mr Cheek’s home was damaged in a 1994 Northridge earthquake. His insurance provider “agreed to pay covered losses at actual cash value at the time of loss, but not more than the amount required to repair or replace the property.”

Now, this gets a bit tricky, but the provider calculated the repair/replace cost at about $560, 000, and applied a damage-depreciation value to arrive at a final payout of approximately $45, 000. Doesn't "actual cost" equate to how much the property is "actually worth"?

Cheeks knew that if he sold his property in its proper state, it would be worth more on the fair market.

Long story short, Cheeks brought his case to appeal court where it was determined that “actual cash value” should mean “fair market value.” Though this insurer intended to deduct for depreciation on the property, the policy omitted this detail in writing.

Cheeks won while the court suggested that all future policymakers explicitly state that they make deductions for depreciation.

Calculation based on “broad evidence rule.”

This rule does not follow the above rules of replacement cost less depreciation. This calculation takes into account every single possible measure of value on the property, hence “broad evidence”. Everything from the property’s age, its accruable or likely profit, and its tax value come into play.

That piece of fine art or vintage wine you bought 30 years ago is worth more today because you and your burglar know your stuff. The application of this broad evidence rule will pay you the exact price of your loss (without allowing you to profit) as if you sold it three minutes ago.

For more information, check out our comparison guide on the difference between replacement and actual cost value insurance.