Texas General Lines — Property and CasualtyProperty and Casualty Insurance BasicsHard
An insured's commercial building is purchased for $800,000. Over time, due to market fluctuations and depreciation, its current actual cash value is $600,000. However, due to inflation and increased construction costs, it would now cost $1,000,000 to rebuild the building with new materials of like kind and quality. What is the replacement cost of this building?
- AUndeterminable without further information
- B$1,000,000
- C$600,000
- D$800,000
Show answer & explanationAnswer & explanation
Correct answer: B. $1,000,000
Replacement cost is the cost to replace an item of property with new property of like kind and quality, at current prices, without any deduction for depreciation. The scenario explicitly states it would cost $1,000,000 to rebuild with new materials of like kind and quality.
Why the other options are wrong
- A. The necessary information is provided in the question.
- C. This is the Actual Cash Value, which factors in depreciation.
- D. This was the original purchase price, not necessarily the current replacement cost.
Replacement Cost (RCV)
The cost to replace damaged or destroyed property with new property of like kind and quality, without any deduction for depreciation.
- Does not factor in depreciation.
- Reflects current market prices for new materials/labor.
- Typically higher than Actual Cash Value.
Memory trick: RCV is 'Rebuilding New', ACV is 'Used Value'.