What does Actual Cash Value (ACV) compensate the insured for?

Actual Cash Value (ACV) is a method of valuation in insurance that provides compensation for the value of property at the time of the loss, taking into account both the replacement cost and depreciation. This method specifically compensates the insured for their actual financial or economic loss, representing what the property is worth in its current condition rather than what it would cost to replace it completely.

This concept is crucial because it allows the insured to receive an amount that fairly reflects the value lost due to damage or destruction. Unlike replacement cost, which ignores depreciation, ACV provides a net value influenced by the wear and tear, age, and condition of the property prior to its loss. Thus, it is designed to compensate the insured fairly for their immediate financial loss rather than future potential or replacement expenses.