Actual cash value is defined as replacement cost minus depreciation. Which option best represents this concept?

• A. Replacement cost minus depreciation
• B. Replacement cost plus depreciation
• C. Face amount of the policy
• D. Pro-rated share of loss

Answer: (A)

Actual cash value is determined by subtracting depreciation from the replacement cost. Replacement cost is the price to replace the item with a new one of similar kind and quality. Depreciation accounts for wear, age, and obsolescence, reducing the replacement cost to reflect the item’s current value. So, replacing today would cost a certain amount, but the item isn’t worth that full amount if it’s old or worn; you measure its value by RC minus depreciation. For example, if replacing a damaged item costs $1,000 and it has $200 of depreciation, the actual cash value is $800. This is why the option that represents RC minus depreciation is the correct choice. The other options don’t fit: replacing cost plus depreciation would overstate value, the face amount is the policy limit, and a pro-rated share of loss relates to how much of a partial loss is covered, not the value of the item itself.