Property & Casualty Insurance Exam (National Portion)Property and Casualty Insurance BasicsEasy
A policyholder suffers a covered loss, and the insurance company determines the value of the damaged property based on its replacement cost minus depreciation. This valuation method is known as:
- AActual Cash Value (ACV)
- BAgreed Value
- CStated Value
- DReplacement Cost (RC)
Show answer & explanationAnswer & explanation
Correct answer: A. Actual Cash Value (ACV)
Actual Cash Value (ACV) is defined as the replacement cost of the property at the time of loss, minus depreciation. This accounts for the age and condition of the property.
Why the other options are wrong
- B. Agreed Value is a valuation method where the insured and insurer agree on the value of the property when the policy is written, and this amount is paid in case of total loss.
- C. Stated Value is a predetermined amount that the insurer will pay for a total loss, regardless of ACV or RC.
- D. Replacement Cost (RC) is the cost to repair or replace property with new materials of like kind and quality, without deduction for depreciation.
Actual Cash Value (ACV)
A method of valuing insured property that calculates the replacement cost of the property at the time of loss, minus depreciation.
- Formula: Replacement Cost - Depreciation = ACV.
- Common for older or used property.
- Results in a lower payout than Replacement Cost.
Memory trick: Value Methods: How much 'Value' will they 'Methodically' pay?