Alabama Property and Casualty Practice Exam

On what basis are losses settled under Equipment Breakdown coverage?

1. Actual Cash Value

2. Replacement Cost

3. Market Value

4. Depreciated Value

The correct answer is: Replacement Cost

Losses under Equipment Breakdown coverage are settled on a Replacement Cost basis. This means that in the event of a covered loss, the insurer will pay the cost to replace the damaged equipment with new equipment of the same kind and quality without deducting for depreciation. This approach is beneficial for policyholders as it provides the ability to maintain operational capacity by replacing damaged equipment with current models rather than compensating them based on the equipment's current cash value, which would factor in wear and tear over time. In this context, Replacement Cost coverage is designed to ensure businesses can restore their equipment to its pre-loss condition without incurring out-of-pocket expenses due to the depreciation typically applied in other valuation methods. This makes it especially important in equipment-intensive industries where downtime can have significant financial implications.