Property & Casualty Insurance Exam (National Portion)Property and Casualty Insurance BasicsHard
A business owner purchases a commercial property policy that states the insurer will pay the cost to repair or replace damaged property with new property of like kind and quality, without deduction for depreciation. This valuation method is known as:
- AMarket Value
- BStated Value
- CReplacement Cost (RC)
- DActual Cash Value (ACV)
Show answer & explanationAnswer & explanation
Correct answer: C. Replacement Cost (RC)
Replacement Cost (RC) valuation pays for the cost to repair or replace damaged property with new property of like kind and quality, without any deduction for depreciation. This allows the insured to fully restore their property.
Why the other options are wrong
- A. Market Value is the price at which property would sell on the open market.
- B. Stated Value is an agreed-upon value at policy inception, often for unique items.
- D. Actual Cash Value (ACV) equals replacement cost minus depreciation.
Replacement Cost (RC)
A method of property valuation that pays for the cost to repair or replace damaged property with new property of similar kind and quality, without any deduction for depreciation.
- Provides full restoration for the insured
- Often requires the insured to actually repair/replace the property to receive full payout
- Typically results in higher premiums than Actual Cash Value
Memory trick: ACV depreciates, RC replaces, STATED is agreed.