Why is depreciation considered when determining "actual cash value"?

Depreciation is a fundamental concept in determining "actual cash value" because it reflects the loss in value that a property experiences over time due to factors such as wear and tear, age, and obsolescence. When assessing the actual cash value of an asset, insurers take into account its original cost and then subtract depreciation to arrive at what it is worth at the time of the loss.

This approach ensures that policyholders receive a fair compensation that corresponds to the asset's current value rather than its original price. For example, a home might have cost $300,000 when purchased, but if it's now several years old and has depreciated, its actual cash value would be much lower than that original cost, reflecting its true worth at the time of a claim. Therefore, recognizing depreciation is essential for accurately representing the financial impact of the loss on the policyholder.