To illustrate the definition of actual cash value as replacement cost less depreciation, consider a 20 year old building with an expected life of 50 years. Depreciation may be figured by using one of several methods. Using the "straight line" method, depreciation (if the building is totally destroyed) is 20/50ths, or 40% of the value of an identical newly constructed building. If the cost to rebuild the structure new today (its "replacement cost") is $100,000, the actual cash value is $60,000 ($100,000 - 40% of $100,000).
It is possible for actual cash value to equal replacement cost. For example. when a fire damages the interior of a newly decorated room of the building and it costs $5,000 to repair the damage and redecorate the room, the repairs have not produced any "betterment" to the building and no depreciation is deducted from the cost of repair. Actual cash value is the equivalent of replacement cost in such cases, and the full $5,000 will be paid.
Suppose the 20 year old building in the first example had been scheduled for demolition the day after it was destroyed by an insured peril. In those jurisdictions using the broad evidence rule, the scheduled demolition would have rendered the building economically valueless. Its actual cash value would be zero and no claim would have been paid under the policy. In other jurisdictions, the loss would have been paid as calculated using the straight line method of depreciation.