Alabama Property and Casualty Practice Exam

On what basis does a Commercial Policy Crime policy pay for losses?

1. Actual Cash Value

2. Replacement Cost

3. Functional Replacement Cost

4. Agreement Value

The correct answer is: Actual Cash Value

A Commercial Policy Crime policy typically pays for losses on an Actual Cash Value basis. Actual Cash Value is defined as the replacement cost minus depreciation. This means that when a loss occurs, the insurer will calculate what the property or item is worth at the time of the loss, taking into account factors such as age, condition, and market value. This approach aligns with the intent of crime policies, primarily to cover losses resulting from criminal activities, such as theft or vandalism, thereby providing a fair assessment of the loss considering depreciation. In contrast, Replacement Cost would cover the cost to replace the lost item at today's prices without regard to depreciation, which is not how Commercial Policy Crime policies generally operate. Functional Replacement Cost is another valuation method that involves replacing an item with a similar function but may not be identical, a method more commonly used in property insurance rather than crime policies. Lastly, Agreement Value pertains to specific arrangements or contracts between parties and does not align with the standard valuation methods applicable in crime coverage.