South Carolina Personal Lines Practice Exam

How is Actual Cash Value (ACV) calculated in insurance?

1. Current Replacement Cost + Depreciation

2. Current Replacement Cost - Depreciation

3. Market Value - Depreciation

4. Original Cost - Depreciation

The correct answer is: Current Replacement Cost - Depreciation

Actual Cash Value (ACV) is a concept commonly used in insurance to determine the value of an insured item or property at the time of a loss, factoring in depreciation. The correct calculation of ACV involves taking the current replacement cost of the item and subtracting any depreciation that may have occurred since the item was purchased. The rationale behind this method is that ACV reflects the item's value in its current state rather than its original cost or market value. By subtracting depreciation, the calculation accounts for wear and tear, obsolescence, and technological advancements that reduce the item's value over time. This approach provides a more accurate financial recovery for the insured based on the actual condition of the property at the time of loss rather than its potential value if it were new. In contrast, the other options do not correctly define how ACV is determined. For instance, adding depreciation or using original or market values does not reflect the current worth considering the impact of time and usage on property value. Therefore, the method of taking the current replacement cost and subtracting depreciation is the proper way to arrive at Actual Cash Value.