Property & Casualty Insurance Exam (National Portion)Property InsuranceMedium
A homeowner's policy provides coverage on an 'actual cash value' basis for personal property. A 5-year-old television, originally costing $1,500, is destroyed in a covered fire. Its estimated useful life is 10 years, and a new, similar television costs $1,200 today. What is the actual cash value of the destroyed television?
- A$1,500
- B$600
- C$750
- D$1,200
Show answer & explanationAnswer & explanation
Correct answer: B. $600
Actual Cash Value (ACV) is calculated as Replacement Cost New minus Depreciation. Depreciation is often calculated as a percentage of useful life. The TV is 5 years old with a 10-year useful life, so it has depreciated 50%. The replacement cost new is $1,200. Depreciation = 50% of $1,200 = $600. ACV = $1,200 - $600 = $600.
Why the other options are wrong
- A. This is the original cost, which is irrelevant for ACV calculation in this scenario.
- C. This would be 50% of the original cost, not the current replacement cost.
- D. This is the replacement cost new, which does not account for depreciation.
Actual Cash Value (ACV)
The cost to replace damaged or destroyed property with new property of like kind and quality, less depreciation.
- ACV = Replacement Cost - Depreciation.
- Depreciation considers age, condition, and obsolescence.
- Common valuation method for personal property and older structures.
Memory trick: ACV is like 'used car value' – what it's worth now, not new, not what you paid.