Actual cash value
The payout method that quietly subtracts depreciation from what you thought you'd collect.
Actual cash value (ACV) is what an insurer pays after subtracting depreciation, age, and wear from the cost to replace what was damaged. It is typically lower than replacement cost, sometimes far lower on an older roof. A policy may instead use fair market value or a "broad evidence rule." Check which method your policy actually uses.
What "actual cash value" actually means
Actual cash value is one way an insurer values a loss when it settles a claim. The most common calculation starts with replacement cost, what it would cost to buy the same thing new, and then subtracts depreciation for age and wear. A twelve-year-old roof does not get replaced dollar for dollar; the payout reflects the roof it was, not a new one.
ACV is not one fixed formula everywhere. A policy can define it as replacement cost minus depreciation, as fair market value, or through what insurers call a "broad evidence rule," weighing several relevant factors instead of one calculation.
"actual cash value (ACV) is one of several possible methods of establishing the value of insured property to determine the amount the insurer will pay in the event of loss," calculated as "(1) replacement cost minus depreciation, (2) fair market value, or (3) via the 'broad evidence rule.'"
Source: IRMI Glossary of Insurance and Risk Management Terms, "Actual Cash Value", International Risk Management Institute
Actual cash value vs. replacement cost
These are two different valuation methods, and the difference between them, depreciation, is often the entire amount in dispute after a loss. Replacement cost pays what it costs to rebuild with materials of like kind and quality, with no deduction for age or wear.
| Actual cash value | Replacement cost | |
|---|---|---|
| Pays for | Replacement cost minus depreciation | Full cost to rebuild, no depreciation deducted |
| Typical result | Lower payout, especially on older property | Higher payout, usually a higher premium |
"Replacement cost is usually defined in the policy as the cost to replace the damaged property with materials of like kind and quality, without any deduction for depreciation."
Source: IRMI Glossary of Insurance and Risk Management Terms, "Replacement Cost", International Risk Management Institute
Where this shows up in your association's coverage
Whether your association's master property policy is written on an actual cash value basis or a replacement cost basis, and what the legal floor is, varies by state. States that adopted the Uniform Common Interest Ownership Act set a floor of 80 percent of actual cash value for the master policy, not full replacement cost. Florida instead requires association property insurance to be based on full replacement cost, determined by an independent appraisal.
The declarations page of your own master policy will state which valuation method applies, and it can set a higher standard than your state's statutory floor even if it can never set a lower one. Read that page directly rather than assuming it matches a neighboring state or a prior association you served on.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
A clubhouse roof, twelve years old, burns in a covered fire. The master policy pays actual cash value. What does the insurer pay for the roof?
Your master policy's declarations page says property is insured on a replacement cost basis. After a covered loss, how does that payout differ from an ACV policy?
A policy values a loss using the "broad evidence rule" instead of a straight depreciation formula. What does that mean in practice?
- IRMI Glossary of Insurance and Risk Management Terms, International Risk Management Institute
- "What's the Difference Between Actual Cash Value Coverage and Replacement Cost Coverage?", National Association of Insurance Commissioners
- West Virginia Code §36B-3-113, State of West Virginia, via FindLaw
- Florida Statutes §718.111(11), The Florida Senate
Insurance
Next, see how replacement cost coverage stacks up against ACV line by line.
Whether your association's master policy pays actual cash value or replacement cost, and what floor your state sets for that choice, varies by state statute and by your own declarations page.