California Property & Casualty Broker-AgentGeneral InsuranceHard
A property owner obtains an insurance policy for a newly constructed commercial building. The policy is written on an 'actual cash value' (ACV) basis. If the building sustains damage, how will the insurer typically calculate the payment for the loss?
- AReplacement cost without deduction for depreciation.
- BReplacement cost less depreciation.
- CThe original cost of the building, regardless of its age.
- DAn agreed-upon value stated in the policy, irrespective of current value.
Show answer & explanationAnswer & explanation
Correct answer: B. Replacement cost less depreciation.
Actual Cash Value (ACV) is calculated as the replacement cost of the damaged property minus depreciation. Depreciation accounts for the wear and tear, age, and obsolescence of the property at the time of loss.
Why the other options are wrong
- A. This describes a 'replacement cost' policy, not an ACV policy.
- C. Original cost is not typically used for loss valuation, as it doesn't reflect current value or depreciation.
- D. This describes an 'agreed value' policy, which is different from ACV.
Actual Cash Value (ACV)
A method of valuing insured property losses, calculated as the cost to replace the damaged property with new property of like kind and quality, minus depreciation.
- Formula: Replacement Cost - Depreciation.
- Aims to indemnify, not over-indemnify.
- Commonly used for older property or personal belongings.
Memory trick: Property values vary, so know your policy's way to pay!