Alabama Property and Casualty Practice Exam

Question: 1 / 400

What type of losses does "replacement cost" insurance cover?

Only the market value of the insured property

The original purchase price of the property

The cost to replace the property without depreciation

Replacement cost insurance specifically covers the cost to replace damaged or destroyed property with a new item of similar kind and quality, without factoring in any depreciation. This means that in the event of a loss, the insured would receive enough funds to buy a new version of the item at current prices, rather than being compensated based only on the item's depreciated value, which is common in actual cash value coverage.

This type of coverage is especially beneficial when property values increase over time, as it ensures that policyholders can replace their lost items with new ones that reflect contemporary prices, rather than being limited to the original value or market value at the time of the loss. This approach helps policyholders avoid financial disadvantages that could arise from depreciation, ensuring that they can effectively restore their asset to its former condition without incurring additional out-of-pocket expenses.

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Only the cost of repairs

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