California Property & Casualty Broker-AgentProperty InsuranceEasy
A client owns a commercial building and wants to ensure that if a fire occurs, the policy will cover the cost to repair or replace the damaged property without deduction for depreciation. Which valuation method should be specified in their commercial property policy?
- AStated Amount
- BActual Cash Value (ACV)
- CMarket Value
- DReplacement Cost (RC)
Show answer & explanationAnswer & explanation
Correct answer: D. Replacement Cost (RC)
Replacement Cost (RC) covers the cost to repair or replace damaged property with new property of like kind and quality, without any deduction for depreciation. This is the most comprehensive valuation method for the insured.
Why the other options are wrong
- A. Stated Amount policies pay the lesser of the stated amount or ACV, and often don't account for full replacement.
- B. ACV deducts depreciation, which would not meet the client's goal.
- C. Market Value considers the property's selling price, which includes factors beyond replacement costs.
Replacement Cost (RC)
A method of valuation that covers the cost to repair or replace damaged property with new property of like kind and quality, without any deduction for depreciation.
- Covers new for old.
- No deduction for depreciation.
- Often requires insuring to a certain percentage of value.
Memory trick: Remember 'RC' means 'Replace Completely' with new.