Texas General Lines — Property and CasualtyProperty and Casualty Insurance BasicsEasy
A client's home is insured for $300,000. During a covered loss, the property sustains $50,000 in damage. The insurer determines the actual cash value (ACV) of the damaged property is $40,000, while the cost to replace it with new materials of like kind and quality is $60,000. If the policy pays on an ACV basis, how much will the insurer pay for the loss, assuming no deductible?
- A$30,000
- B$60,000
- C$50,000
- D$40,000
Show answer & explanationAnswer & explanation
Correct answer: D. $40,000
Actual Cash Value (ACV) is calculated as Replacement Cost minus Depreciation. If the policy pays on an ACV basis, the insurer will pay the determined ACV of the damaged property, which is $40,000, up to the amount of the loss.
Why the other options are wrong
- A. This value is lower than the ACV and is not directly derived from the given information.
- B. This is the Replacement Cost, which would be paid under a Replacement Cost Value (RCV) policy, not an ACV policy.
- C. This is the total damage sustained, but an ACV policy pays the ACV of the damaged items, not necessarily the total damage.
Actual Cash Value (ACV)
A method of valuation that calculates the cost to replace damaged property with new property of like kind and quality, less depreciation.
- Replacement Cost - Depreciation
- Common in property insurance
- Results in lower payout than RCV
Memory trick: ACV: Always Consider Value-Depreciation.