What does 'actual cash value' mean in the context of insurance?

'Actual cash value' in the context of insurance refers to the replacement cost of an item at the time of loss, minus depreciation. This means that when a claim is made, the insurer will evaluate what it would cost to replace the item new and then subtract any decrease in value due to factors such as wear and tear or age. This method provides a realistic assessment of what the property is worth at the moment right before the loss occurred, taking into account its condition.

This definition is important for policyholders to understand, as it can significantly affect the amount they receive in the event of a claim. It contrasts with other valuation methods, such as replacement cost, which considers the cost of replacing an item without depreciation. By factoring in depreciation, 'actual cash value' gives a more precise idea of the current financial worth of the property that was lost or damaged.