Chapter 2

Question 1

Replacement cost

Answer 1

The cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation.

Question 2

Like kind and quality

Answer 2

A method of determining replacement cost valuation using a comparable model or item.

Question 3

Functional valuation approach

Answer 3

A valuation method in which the insurer is required to pay no more than the cost to repair or replace the damaged or destroyed property with property that is its functional equivalent.

Question 4

Principle of indemnity

Answer 4

The principle that insurance policy should provide a benefit no greater than the loss suffered by an insured.

Question 5

Actual cash value

Answer 5

Cost to replace property with new property of like kind and quality less depreciation.

Question 6

Straight-line depreciation method

Answer 6

An accounting method of calculating depreciation by taking an equal amount of an asset’s cost as an expense for each year of the asset’s expected useful life.

Question 7

Accelerated depreciation

Answer 7

Depreciation that occurs more rapidly when an item is first purchased and then more slowly in subsequent years.

Question 8

Decelerated depreciation

Answer 8

Depreciation that occurs slightly for a given time period and then increases rapidly.

Question 9

Obsolescence

Answer 9

The loss of value caused by changes in technology or fashion.

Question 10

Market value

Answer 10

The price at which a particular piece of property could be sold on the open market by an unrelated buyer and seller.

Question 11

Broad evidence rule

Answer 11

A court ruling explicitly requiring that all relevant factors be considered in determining actual cash value.

Question 12

Valued policy law

Answer 12

A law that specifies that insureds may recover the policy limit for certain losses regardless of the actual value of the property.

Question 13

Pair or set clause

Answer 13

A policy provision that indicates how values will be determined when a part of a pair or set is lost, damaged, or destroyed.

Question 14

Policy limits

Answer 14

The maximum that can be paid on a claim, regardless of the actual value of the property damaged.

Question 15

Special limits of liability

Answer 15

Internal dollar limits on certain specified classes of property that apply regardless of the overall policy limit.

Question 16

Straight deductible

Answer 16

A specified dollar amount that the insured must pay towards a covered loss.

Question 17

Split deductible

Answer 17

A deductible provision that applies one deductible for most causes of loss but a different, higher deductible for other specify causes of loss.

Question 18

Absorb a deductible

Answer 18

To apply the deductible to the actual loss before applying any coverage limits.

Question 19

Condition

Answer 19

Any provision in an insurance policy that requires an otherwise enforceable promise of the insurer.

Question 20

Primary coverage provision

Answer 20

An other-insurance provision that specifies that the policy pays the lost amount before other applicable policies until its own limits have been exhausted.

Question 21

Excess of other insurance

Answer 21

Insurance that pays an amount over the primary layer of coverage.

Question 22

Proportional share (pro rata share)

Answer 22

An approach to other insurance by which the insurers contribute to the loss payment in the proportion to which they contribute to the total amount of coverage purchased (their limits of liability).

Question 23

Payment by equal shares

Answer 23

An approach to other insurance by which the loss is paid equally by both policies until one policy is exhausted; then the other policy alone pays.

Question 24

Payment by amounts payable

Answer 24

An approach to other insurance by which each insurer pays a portion of the loss equal to the amount that one insurer would separately pay, divided by the total of the separate amounts payable by all insurers.

Question 25

Guiding principles

Answer 25

A set of industry-agreed-upon principles designed to resolve situations of overlapping coverage.

Question 26

Waiver

Answer 26

The intentional relinquishment of a known right.

Question 27

Estoppel

Answer 27

A legal principle that prohibits a party from asserting a claim or right that is inconsistent with that parties past statement or conduct on which another party has detrimentally relied.

Question 28

Nonwaiver agreement

Answer 28

A signed agreement indicating that during the course of investigation, neither the insurer nor the insured waives rights under the policy.

Question 29

Reservation of rights letter

Answer 29

An insurer’s letter that specifies coverage issues and informs the insured that the insurer is handling a claim with the understanding that the insurer may later deny coverage should the facts warrant it.

Question 30

Proof of loss

Answer 30

A statement of facts about a loss for which the insured is making a claim.

Question 31

Examination under oath

Answer 31

A statement given by a person who has sworn to tell the truth before an officer of the court.