What is "actual cash value" in property insurance?

Actual cash value (ACV) in property insurance is defined as the replacement cost of the property minus depreciation. This method calculates the worth of an item by accounting for its current condition and the decrease in value over time due to wear and tear or obsolescence. This approach allows insurers to provide a fair payout that reflects the true value of the property at the time of loss.

For example, if a policyholder has a roof that originally cost $10,000 to replace but is now ten years old, the insurer would assess how much a new roof would cost and subtract a portion for the depreciation that has occurred over those ten years. This way, the insured receives compensation that is equitable based on the actual condition of the property at the time of the claim.

The other choices describe different concepts: the total market value refers to what a buyer would pay, the value based on market trends considers fluctuations, and maximum payout refers to policy limits rather than how value is assessed for compensation. Each of these does not align with the principle of actual cash value, which focuses specifically on replacement cost adjusted by depreciation.