Actual cash value

Insurers use either the actual cash value or the replacement value of items when calculating commercial property insurance claims. The actual cash value is how much the used item is worth, while the replacement value is how much it would cost to purchase a new item to replace it.

To determine the actual cash value, an insurer will look at the item's current market cost, and then factor in depreciation. An item's depreciated value is based on how old the item is, and how much useful life it has left at the time of the loss.

Let's say your two-year-old laptop is stolen and you have an actual cash value property insurance policy. Two years ago, the laptop cost $2,000, but today a similar laptop costs $2,500.

Your insurance provider determines that the useful life of a laptop is five years, which means the stolen laptop had 60% of its useful life left. To find the actual cash value, you multiply the replacement cost of $2,500 by 60%. That means the actual cash value of the laptop is $1,500.

It may make sense to insure your property at its actual cash value if:

• You can quickly find acceptable used replacements for your items.
• You want to save money on your property insurance premiums.

However, a replacement value policy (which replaces the item at the current market price of a similar item) may be more effective if you’ve invested a lot of money in your property or you use highly specialized equipment. Though the premiums are usually higher than ACV policies, the bigger payout may make it easier for you to find replacement items faster.

Lastly, if you have leased equipment, you may not have the option of insuring it at its actual cash value – just its replacement value.

If you have questions about which property insurance option is a better fit for your business, be sure to talk to your insurance agent.

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