In a Dwelling insurance policy losses are assessed based on the real value of the property at the time of the loss, minus an adjustment regarding physical depreciation. This valuation method is commonly known as Actual Cash Value. For example, if your home has a 100-year shelf life and it’s destroyed by a hurricane after 25 years, the depreciation would be 25%, i.e. a quarter of its shelf life.
To calculate the Actual Cash Value, we must determine the cost of replacing an identical property nowadays; and we subtract the depreciation to that amount. For example, if the replacement cost is $ 150,000 today, after applying the replacement cost formula minus the depreciation, we would get an Actual Cash Value of $ 112.500.