What term is used for the amount an insurer agrees to pay for a loss after deducting depreciation?

The term used for the amount an insurer agrees to pay for a loss after deducting depreciation is known as Actual Cash Value (ACV). ACV is calculated by taking the replacement cost of the item or property and subtracting any depreciation that has occurred since the item was purchased. This method reflects the item's current value rather than the cost to replace it entirely.

Understanding the concept of ACV is crucial for both policyholders and adjusters because it directly influences the settlement amount for claims involving property damage or loss. In practical terms, if a homeowner has a roof that originally cost $10,000 and has depreciated over time to have a current value of $6,000, the insurer would calculate the payout based on this ACV, which results in a more equitable assessment of the loss compared to simply considering the replacement cost without accounting for depreciation.

This distinction helps in measuring the value of property accurately when a loss occurs and ensures that policyholders understand how much they can expect to recover in the event of a claim.