Actual cash value
What is actual cash value?
Actual cash value is the value of replacing your property after factoring in depreciation. It is typically similar to the amount you would expect to receive if you sold the property before it was damaged or lost.
For example, say you paid $3,000 for a new laptop for your web development business and used it for two years before someone damaged it beyond repair. The actual cash value of replacing the laptop would likely be significantly less than the amount you originally paid.
If the laptop is covered by an actual cash value commercial property insurance policy, your insurance carrier would determine the expected service life of your laptop and how long you used it, among other considerations, when deciding how much to reimburse you.
Actual cash value insurance
Insurance providers sometimes use actual cash value to determine how much to pay a policyholder if their insured property requires replacement. An actual cash value policy is generally less expensive than replacement cost insurance because it typically doesn't provide reimbursement for the total purchase price.
Small technology businesses with expensive equipment and other property could be forced to pay for repair or replacement of business property out of pocket if they don’t have an actual cash value or replacement cost policy.
Actual cash value vs. replacement cost
When considering commercial business insurance policies, you need to weigh the pros and cons of actual cash value vs. replacement cost.
Actual cash value takes depreciation into consideration. Replacement cost is measured by how much it would cost to replace the property without considering depreciation.
For example, if a digital marketing agency purchased its office furniture for $3,000 in 2015 and the current value of a similar setup is $4,000 today, then the replacement value insurance is worth $4,000.
Actual cash value works differently as it factors in the service life of the insured property. If the furniture purchased for $3,000 has an expected service life of 10 years, then the value after depreciation would be $1,500 five years after it was purchased (50% of the purchase price).
How is actual cash value determined by insurance companies?
Insurance companies calculate actual cash value by determining the service life of the insured property, which is either done at the start of the policy or when a claim is made.
Depreciation with an actual cash value policy is determined by dividing the total cost of the property by its service life. The amount of a claim will depend on when it was filed in relation to the service life.
Policyholders who have actual cash value insurance can calculate how much their insurance is worth by determining the replacement cost of the property and subtracting the depreciation amount from the replacement cost.
Pros and cons of actual cash value insurance for tech companies
One notable benefit of actual cash value insurance for tech businesses is the ability to receive coverage for expensive technology equipment at an affordable price.
Actual cash value insurance ensures a fair value valuation by factoring in the initial cost and depreciation. The downside to actual cash value insurance is that the insurance does not pay as much as replacement cost insurance if replacement is necessary.
In general, actual cash value insurance is appropriate if you're on a tight budget. Business owners with larger budgets may prefer replacement cost insurance.
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