Louisiana P&C Adjuster Practice Exam

How is actual cash value (ACV) determined?

1. Replacement cost plus total depreciation

2. Replacement cost minus total depreciation

3. Market value plus accrued depreciation

4. Market value minus future depreciation

The correct answer is: Replacement cost minus total depreciation

Actual cash value (ACV) is a method of determining the value of an insured item at the time of a loss, accounting for depreciation. The calculation for ACV is typically expressed as the replacement cost of the item minus total depreciation. This approach allows for a fair assessment of the item's current worth, reflecting both the cost to replace the item with a similar one and the loss in value due to age, wear and tear, or obsolescence that has occurred over time. This valuation method is widely accepted in the insurance industry for several reasons. It ensures that insurance payouts are reasonable and reflect the true current state of the item in question rather than providing a higher, potentially inflated value that doesn’t account for depreciation. By focusing on replacement cost minus depreciation, insurers aim to balance the interests of both policyholders and the financial sustainability of the insurance system. The other options present different forms of value assessment that do not align with the established method of calculating ACV. Specifically, while options involving market value may provide some assessment grounding, they do not precisely capture the intended framework of replacement costs adjusted for depreciation when determining ACV.