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 determined by taking the replacement cost of an item and subtracting total depreciation. This method reflects the item's current value in a fair and equitable way, accounting for factors such as age, wear and tear, and any other conditions that would diminish its value over time. The replacement cost represents what it would cost to replace the item with a new one of similar kind and quality. By subtracting total depreciation from this figure, ACV provides a more accurate representation of what the owner would receive if an item were lost or damaged, as it recognizes the economic reality of the item's current state. This approach ensures that policyholders are compensated fairly based on the current value of their property, rather than how much it would cost to replace it without considering depreciation.