Registered Insurance Brokers of Ontario (RIBO) Practice Exam

What does Actual Cash Value mean in the context of insurance?

1. Replacement cost plus depreciation

2. Replacement cost minus depreciation

3. Market value of the property

4. Sum total of insured assets

The correct answer is: Replacement cost minus depreciation

Actual Cash Value (ACV) is fundamentally defined as the replacement cost of an item minus depreciation. This means that when an insurance policy references ACV, it takes into account how much an item would cost to replace today, while also factoring in the decrease in value due to age, wear and tear, or obsolescence. By using this definition, when a claim is made, the insurer will provide compensation based on what the property would be worth in its current condition — considering both its replacement cost and the depreciation that has occurred since the item was new. The other choices reflect different concepts in insurance valuation. Replacement cost plus depreciation does not correctly represent the intention behind ACV; rather, it would result in an inflated value. The market value of the property could vary widely based on external factors and is not necessarily how insurers determine ACV. Lastly, the sum total of insured assets does not specifically address how individual items are valued concerning depreciation and replacement costs. Hence, the correct understanding consistently aligns with the definition of Actual Cash Value as the replacement cost minus depreciation.