Alabama Property and Casualty Practice Exam

In property insurance, which term is used to describe the financial value of property at the time of loss?

1. Market value

2. Replacement cost

3. Agreed value

4. Actual cash value

The correct answer is: Actual cash value

In property insurance, the term that describes the financial value of a property at the time of loss is known as Actual Cash Value (ACV). This concept reflects the current worth of the property, taking into account depreciation since its original purchase. ACV is determined by subtracting any depreciation from the replacement cost of the property, which means it recognizes the decrease in value over time due to factors like aging, wear and tear, and market fluctuations. Other terms that are often confused with Actual Cash Value include Market Value, Replacement Cost, and Agreed Value. Market Value refers to what a willing buyer would pay for the property on the open market, which can differ significantly from its value as determined by an insurance policy. Replacement Cost is the amount it would take to replace the property at current prices without considering depreciation. Agreed Value is a specific amount that the insurer and the insured agree upon beforehand for a particular property, useful in situations where regularly fluctuating values are present, like in antique or collector items. However, none of these terms accurately capture the essence of value adjusted for depreciation at the time of loss, which is precisely what Actual Cash Value signifies in a property insurance context.