California Property & Casualty Broker-AgentProperty InsuranceEasy
A client owns a commercial building and wants to ensure that the policy will pay for the replacement of damaged property without deduction for depreciation. Which valuation method should be specified in their Commercial Property policy?
- AReplacement Cost (RC)
- BStated Amount
- CFunctional Replacement Cost
- DActual Cash Value (ACV)
Show answer & explanationAnswer & explanation
Correct answer: A. Replacement Cost (RC)
Replacement Cost (RC) coverage pays for the cost to repair or replace damaged property with new property of like kind and quality, without any deduction for depreciation.
Why the other options are wrong
- B. Stated Amount pays the lesser of the stated amount, ACV, or repair cost.
- C. Functional Replacement Cost replaces outdated property with modern, functional equivalents, not necessarily new for old.
- D. Actual Cash Value deducts depreciation from the replacement cost.
Replacement Cost (RC)
A method of valuation that pays for the cost to repair or replace damaged property with new property of like kind and quality, without any deduction for depreciation.
- No depreciation deducted
- Encourages full rebuilding
- Higher premium than ACV
Memory trick: Replacement Cost: Rebuild Completely, No Depreciation