How is actual cash value determined?


Actual cash value is a very important provision of homeowners insurance in that it determines the basis for the valuation of loss covered under the policy. If actual cash value is specified in your home insurance policy terms and conditions, you cannot expect to get back what you have paid for the property damaged or stolen in the event of a claim.

How Actual Cash Value Works

  • Unless the replacement cost endorsement has been added to the policy, most homeowners insurance policies use actual cash value to determine the current value of losses to personal property.
  • In order to calculate the amount that the insured is to receive as compensation for their losses, home insurance adjusters have to determine the cash value of the property at the time of loss. Adjusters determine this amount through a special formula, in which the actual cash value of a property is represented as its replacement cost less depreciation.
  • Since personal property, such as buildings, electrical appliances, carpets, sofas, and so on, wears off with time, logically, its price goes down every year it has been in exploitation. Depreciation of a property item is determined solely by its age. The longer an item has been in use, the more its value has depreciated.
  • The variable of depreciation is applied in the formula, being subtracted from the item's replacement cost, to arrive at the item's actual cash value.

Actual Cash Value Vs Replacement Cost

If you suffer from a property loss, you might end up adequately reimbursed for it, if your compensation is determined on the basis of actual cash value. The gap between actual value and replacement cost is sometimes too huge; some people receive only half the amount of what they have paid for in homeowners compensation.

The good news is that this can be avoided. Before signing the home insurance contract, make sure that you have read the policy conditions, and added the replacement cost provision. It might cost you a few extra bucks but it guarantees that you will be paid the amount necessary for an item to be replaced, without the factor of depreciation being applied.

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