What is used in the formula for calculating the actual cash value of a property?

The actual cash value (ACV) of a property is calculated using the replacement cost method minus depreciation. This method reflects the amount it would take to replace an asset with a new one of like kind and quality, adjusted for the wear and tear or obsolescence that the property has experienced over time. Therefore, replacement cost is a fundamental component in determining the ACV, as it directly accounts for what it would cost to replace the property rather than what someone might pay for it in the market or some predetermined value.

Using fair market value, agreed value, or stated value does not adequately reflect the true current value of the property based on its replacement cost and condition. Fair market value can vary widely based on market conditions, agreed value is a set value established ahead of time regardless of property condition, and stated value refers to a fixed amount declared by the insured—none of these take into account the necessary calculations involving depreciation that replacement cost does. This makes replacement cost the most appropriate choice for calculating actual cash value.