Actual cash value (ACV) is a way for your insurer to ensure that you receive fair compensation for a damaged or destroyed vehicle, and any property involved in the accident.
It is a standard methodology employed by insurance companies that allows the insurer to value the insured property.
It is calculated through taking the value of depreciation away from the value of the replacement cost of the vehicle. It enables the insurer to work out how much your vehicle is worth in its current condition (based on age and sometimes use) in comparison to when it was purchased.
What is depreciation?
Depreciation for actual cash value calculations is worked out by establishing what the “useful” life of a vehicle is, and how much of that life remains.
So for example; let’s say you are covering a truck which you paid $50,000 for on the forecourt (the calculation gets more complex if you are buying a second hand vehicle – the insurer will use a guide amount to the value of the vehicle, and not necessarily the amount you paid for it). The insurer may assign a useful life of 10 years to your truck.
So the depreciation of your truck to the insurer is $50,000 divided by 10 years or $5,000 a year. So if you have an accident after five years of driving your truck. The depreciation would be $25,000. However at the time of your accident the cost of a new truck might be $55,000 in which case the insurer could use this figure to calculate the depreciation, and this would then be $27,500.
Actually this model is slightly over simplified; your insurer may use a slightly more complex model for depreciation. However this is the essence of how depreciation for actual cash value is calculated.
The actual cash value of a vehicle is then calculated by subtracting the depreciation from the cost of a new vehicle – which using our two examples would be $25,000 or $27,500 respectively.
What does ACV mean to me?
Actual cash value is one of many different ways of assessing how much an insurer will pay out in the event of a claim; there are other models that your insurer may use. Sometimes the actual cash value will be lower than you need to pay to resolve your issue if this may be the case it might be wise to consider gap insurance to offset the balance.
Click here to read more about getting the actual cash value of your vehicle