Looking at your auto insurance policy, you may notice a term labeled “actual cash value” on the declarations page near “Collision” or “Other Than Collision.”
Actual cash value is a term you have probably glanced over without considering for too long because you have seen it so many times. But the phrase may never seem relevant to you until you have a car accident and the damage appraiser lists the repairs as calculated based on ACV.
The Concept of ACV
If you are in a car accident and you own a new car, the insurance company may owe you new parts plus payment for the labor it takes to complete the repairs. If your car is an older model, in theory they owe labor plus parts that have the same degree of wear and tear as those that were damaged.
If insurance companies paid for new parts to repair old cars, they would make insured's better off than they were before an accident. That sort of enrichment could encourage fraud. So instead of giving new parts for old, they pay claims based on ACV.
Calculating Actual Cash Value
Paying a claim based on ACV could mean repairing your car with used parts, assuming they are available. But even if an auto appraiser could find parts identical to the ones that were damaged in your older car, you might not want them. So the insurance company usually calculates repairs based on new parts, deducts an amount for depreciation and then pays the claim.
Can You Avoid Depreciation?
As an insured, you should be familiar with the concept of actual cash value. But even if you understand ACV, if your car is in an accident you probably won’t like having depreciation deducted from the claim payment.
To avoid the problems that depreciation can cause, some insurance companies will add a replacement cost coverage endorsement to your policy. The endorsement allows certain auto claims to be paid without deducting depreciation.
If you have any questions about your vehicle’s value or how much coverage you need, be sure to speak with an insurance agent. It is critical to get the coverage you need for your vehicle so that you can drive knowing you are covered.