Texas General Lines — Property and CasualtyProperty and Casualty Insurance BasicsEasy
A commercial property policy specifies that the insurer will pay the full cost to replace damaged property with new property of like kind and quality, without deduction for depreciation. This describes which valuation method?
- AMarket Value
- BStated Amount
- CReplacement Cost
- DActual Cash Value
Show answer & explanationAnswer & explanation
Correct answer: C. Replacement Cost
Replacement Cost (RC) is the cost to replace damaged property with new property of like kind and quality, without any deduction for depreciation. This is the most common and often preferred method for modern property.
Why the other options are wrong
- A. Market Value is the price a willing buyer would pay a willing seller, not necessarily replacement cost.
- B. Stated Amount is an agreed maximum payable, often for hard-to-value items, but doesn't define the 'cost to replace' principle.
- D. Actual Cash Value (ACV) deducts depreciation from the replacement cost.
Replacement Cost (RC)
The cost to replace damaged property with new property of like kind and quality, without deduction for depreciation.
- No depreciation applied.
- Allows the insured to fully restore property.
- Often requires the insured to actually replace the property to receive full RC.
Memory trick: ACV Depreciates, RC Replaces, Market Sells, Stated Limits.