In property insurance, what does the term 'actual cash value' refer to?

The term 'actual cash value' in property insurance refers to the replacement cost of the property minus depreciation. This concept takes into account the current value of the property by factoring in wear and tear, age, and obsolescence. Essentially, it represents what the property is worth at the time of a loss, considering any reduction in value due to these factors.

For example, if a homeowner has a roof that costs $10,000 to replace but is 10 years old, the actual cash value would be calculated by determining how much the roof has depreciated over those 10 years. Therefore, if the depreciation amounts to $3,000, the actual cash value would be $7,000.

Understanding this definition is crucial for policyholders when determining what compensation they might expect in the event of a loss, as it often differs from the original purchase price or even the market value, which do not account for depreciation.