“What does Actual Cash Value (ACV) mean? I need to understand how it works so I can make sure I buy the right amount of insurance.” That was a valid question asked recently by one of my clients and if one client wants a better explanation, there will be others who want or need to know.
Most of us are familiar with the term “Replacement Cost” as the majority of insurance for property is based on that valuation in the event of a loss. The insurer will repair or replace the insured items with like kind and quality without any allowance for depreciation. There is however a stipulation that you must have purchased the amount of insurance that you would need to replace the items.
If the valuation clause is based on Actual Cash Value, then the insurer will compensate you based on what the value of the item is at the time of the loss.
The best way to explain this may be by way of an example…….
XYZ Excavating has a 2011 Bobcat S850 which he purchased and insured back in 2015 for $50,000. Because of its age, the insurer would only provide Actual Cash Value coverage. The item was stolen and never recovered.
In order to determine actual cash value, they will consider the following:
- Condition at the time of the loss
- Number of hours on the unit
- The Bobcat S850 is still being manufactured. The new value is around $75,000
- What are similar models selling for today
Bear in mind that every insurer has their own methodology when it comes to determining actual cash value. It’s not uncommon for an insured to disagree with the offer that the insurer makes. It’s also not uncommon to enter into a negotiation with the insurer should the insured have information that may lead to a higher valuation.
If an agreement is still not reached, the insured has options.
He/she has the right to enter into a “Dispute Resolution Process”. Most provinces have some form of “DPR” in their Insurance Acts. In Alberta, its section 519. This process is more fully explained at the Government of Alberta, Consumer Complaints website.
For more information on Actual Cash Value or anything insurance, just reach out. Always happy to answer any question.
