What does "actual cash value" typically determine in a claim?

"Actual cash value" is a fundamental concept in property insurance that determines the value of an asset when a claim is made. It is calculated by taking the replacement cost of the property—how much it would cost to replace it with a new item of similar kind and quality—and then subtracting depreciation. Depreciation accounts for the wear and tear, age, and obsolescence of the property, providing a more realistic value that reflects its current worth at the time of the loss.

This approach ensures that the insured receives a fair compensation that considers both the asset's current state and its replacement potential. For example, if a roof is damaged, the insurer would consider how much it would cost to replace that roof with a new one, then deduct the depreciation based on how old and worn the roof was at the time of the claim. This method helps allocate a reasonable payout that aligns with the insured's financial loss, rather than overvaluing the property based on its original cost or its current market value.