South Dakota Crop Insurance Practice Exam

How is actual cash value determined?

1. Market value minus taxes

2. Replacement cost plus depreciation

3. Cost of restoration at the time of loss

4. Replacement cost minus depreciation

The correct answer is: Replacement cost minus depreciation

Actual cash value (ACV) is determined by evaluating the replacement cost of an item and then accounting for depreciation. This approach reflects the item's current market value based on its condition and age at the time of the loss, rather than its original purchase price or potential future value. By subtracting depreciation from the replacement cost, ACV provides an accurate and fair settlement amount for claims. Replacement cost represents how much it would cost to replace the item with a new one of similar kind and quality, while depreciation accounts for the wear and tear, age, and obsolescence of the item. The resulting figure, calculated by taking the replacement cost and subtracting depreciation, gives the actual cash value at the time of the loss. This method is widely accepted in insurance practices as it helps ensure that policyholders receive compensation that accurately reflects the value of their property at the moment of loss.