1/J - Valuation, Deductibles, and Coinsurance

Question 1

Valuation

Answer 1

The process of estimating what an item is worth

1. Actual Cash Value (ACV)
2. Replacement Cost (RC)
3. Agreed Value
4. Stated Amount

Question 2

Actual Cash Valuation

Answer 2

A valuation method that takes into account an item’s depreciation.

• Same as fair market value and depreciated value
• ACV offers lower premiums for less coverage
• Formula: Replacement cost minus depreciation

Question 3

Depreciation

Answer 3

Replacement Cost
A method of valuation based on the cost of replacing an item at current market prices, regardless of depreciation

Can be determined through simple market research

Depreciation
An item’s estimated loss of value due to wear, tear, and age

Can usually be determined with:

• Standard Depreciation Schedules
• Estimating Software

Question 4

Calculating Depreciation

Answer 4

Annual Depreciation: replacement cost divided by the item’s useful life

Accumulated Depreciation: the item’s annual depreciation multiplied by its age

Question 5

Broad Evidence Rule

Answer 5

• Used in some states
• ACV does not simply come down to RC minus depreciation
• Takes into consideration any evidence available to determine value

Question 6

Replacement Cost

Answer 6

Cost to produce an exact replica of damaged property in the same manner it was originally produced

Characteristics of Replacement Cost:

• No depreciation
• Based on the replacement cost at the time of loss
• Higher premiums

Question 7

RC and the Principle of Indemnity

Answer 7

The insured cannot profit from a loss.

The insurer often will pay the full amount after the insured submits his proof of replacement.

Question 8

Functional Replacement Cost

Answer 8

• Pays to replace an outdated, obsolete item with a functionally equivalent item - not an identical item
• Level of coverage falls between RC and ACV

Question 9

Obsolescence

Answer 9

• When something is no longer used or wanted, despite being in good working order
• Usually a result of a newer, improved alternative
• Causes rapid depreciation

Question 10

Valued Policy

Answer 10

AKA Agreed Value or Guaranteed Value:

• Value is determined prior to the insurance of a policy
• Avoids the confusion of assessing appreciation or depreciation

Question 11

Stated Amount (Stated Value)

Answer 11

• Property value is stated by the insured when applying for insurance
• When loss occurs, policy pays up to the stated amount or ACV, whichever is less

Question 12

Agreed Value vs. Stated Value