In insurance, the actual cash value is the value of the asset at the current time based on current conditions.
There are some factors by which actual cash value can be evaluated:
- Current Condition
- Class of construction
- Built-in additional features
- Square footage area (In case of Property)
These terms can be easily understood with the help of a scenario:
If a person bought a computer 5 years ago for $500 and got it insured. Now it got damaged, so the insured wants to buy another one. But the coverage that the Insured takes for this one is of ACV i.e. Actual cash value. So the Insurance Company will calculate its Actual Cash value based on the above factors i.e when the computer was bought, what is its current condition (how much it is damaged), etc. After evaluation, the company will pay the person for example $250. So we can see in this case that the value could be reduced to even half based on these factors.
Actual Cash Value= Replacement Cost – Depreciation
Cost to replace, rebuild, or get new of the structure-property in the current day. Simply put it is the cost to purchase a new asset in case the asset got damaged.
The scenario in such includes:
If a person bought a computer 5 years ago for $500 but now it got damaged. So the company will pay the insured money to replace the computer with a new one. It could be $500 or more. The current condition is not considered in this case.
The amount could be concluded as the amount taken into account the asset’s condition like age, condition, location, square foot area (in case of a property), etc.
- Actual Cash Value and Replacement Cost are mainly applicable on property insurance
- The company prefers to pay Actual Cash Value since it is less expensive for them.
- Actual Cash Value yields lesser Premiums
- Replacement Cost yields higher Premiums
In Personal Lines Policies, its details could be found in the AL3 group: 5REP
5REP: (Dwelling Replacement Cost Group)
The Dwelling Replacement Cost Group is used to provide detailed information of the individual features that are applicable to the unit at risk and have contributed to the Replacement Cost amount. The group contains the data elements necessary to determine the replacement cost using the square foot method. The replacement cost estimating system used is established between the communicating pairs. The company will expect the agent to use the specific terminology and definitions utilized by that vendor, based on the replacement cost materials distributed by the company. The definitions in this section are generally indicative of the meaning of the data elements but may have varying interpretations by the vendor. The group is used for either Homeowners or Dwelling Fire Transactions. It appears at Level R2 and is attached to the Homeowners and Dwelling Fire Rating/Underwriting Group.
Important elements in this group to get the details:
- Evaluation System Code: A code to evaluate and identify the replacement cost vendor system that is being used.
- Base Cost: The dollar value assigned for the basic components of the dwelling. For the square foot method, most estimating systems determine the base costs by factors like the number of stories of the building, the number of families residing in the property, the ground floor square foot area, and the exterior wall classification.
- Built-in Total Amount: Features/assets comprise in the dwelling structure which is not intended to pull out and are not considered as personal property or contents. These features are assigned values by the estimating systems. Examples are built-in ovens/ranges, attic fans, garbage disposals, etc.
- Total Additional Feature Amount: The sum of the dollar amounts for items such as garages, finished attic/basement, porches, extra baths, and built-ins, etc. that are applicable to this dwelling.
- Depreciation Amount: This could be concluded as the amount taken into account the asset’s condition like age, condition, location, square foot area (in case of a property), etc.
- Actual Cash Value Amount: This data element is the current value of the dwelling based on its age, condition, location, class of construction, built-in/addition features, and square footage area.
- Insurable Value: The insurable value of the building or property.