1-J Valuation, Deductibles, and Coinsurance Flashcards
Valuation- Actual Cash Value
A valuation method that takes into account an items depreciation.
- Same as fair market value and depreciated value.
- ACV offers lower premiums for less coverage.
- Formula: Replacement cost minus depreciation.
Valuation - Replacement Cost/ Depreciation
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 items estimated loss of value due to wear, tear, and age.
Can usually be determined with:
- Standard Depreciation schedules
- Estimating software
Annual Depreciation/ Accumulated
Annual- Replacement cost divided by the items useful life.
- Calculate Depreciation:
Accumulated Depreciation: The items annual depreciation multiplied by its age.
Annual Depreciation: $10. ($100/ 10)
Accumulated Depreciation $30 ($10 x 3)
- Calculate actual cash value (ACV)
Replacement Cost $100
- Depreciation ($30)
———————————–
ACV: $70
Broad Evidence Rule
- Used in some states
- ACV Does not simply come down to RC Minus depreciation.
- Takes into consideration any evidence available to determine value.
Replacement Cost:
Characteristics of Replacement Cost:
- No Depreciation
- Based on the replacement cost at the time of loss.
- Higher premiums.
EX. Sally’s roof is 3 years old. It get’s destroyed in a hailstorm, and it will cost sally 12k to replace it. Even though the ACV of the roof was only 8k, an RC policy. would pay sally 12k for the loss.
RC & Principle of indemnity
- The insured cannot profit from the loss/
- The insurer often waits to pay the full amount until the insured submits proof of replacement.
Example of Replacement Cost
Roberto’s hail destroyed roof:
- Replacement cost (RC) of 10k
- First check of 6k ACV
- Roberto Replaces roof for 7k
- So, insurer sends second check for only 1k
Total indemnity for Roberto: 7k
Insurer saves 3k
Functional Replacement cost
- Pays to replace an outdated, obsolete item with functionality equivilant item. Not an identical item.
- Level of coverage falls between RC and ACV.
Obsolescence
- 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
EX. Walls made of lath and plaster
- VCR’S
- Portable CD players
Valued Policy (aka Agreed value or guaranteed value)
A valuation method that assigns a set value to each insured item.
- Value is determined prior to the issuance of policy.
- Avoids the confusion of assessing appreciation or depreciation.
EX. Antique jukebox appraised at 25k
- Valued policy for jukebox: 25k
- Policy will pay 25k exact if jukebox is destroyed or damaged (minus deductible)
Sated Amount (Stated Value)
- 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.
Agreed Value vs Stated Value
Agreed: Insured is paid the agreed amount, regardless of ACV
Stated: -Lower Premiums
- Good choice if insured can’t afford to insure an item for it’s full value.
Partial VS Total Loss
Partial Loss: When insured property is only partly damaged, and repair costs fall within the policy limit.
Total Loss: When insured property is damaged so badly that it is not worth repairing.
two types: Actual total loss, constructive total loss.
Actual vs constructive total loss
Actual Total loss: When property is completely destroyed and unrepairable.
Constructive Total Loss:
When the cost of repairing damaged property is higher than the properties current value.
- Sometimes used when repairs would cost more than policy limit.
- The insurer may keep the damaged property or deduct it’s salvage value from the claim.
Deductible
The amount the policyholder must pay out of pocket before the insurer will pay for losses.
- Lets the policyholder decide how much risk he is willing to take
- Found on the declarations page
- 3 TYPES
- FIXED
- PERCENTAGE
- FRANCHISE
