Alabama Property and Casualty Practice Exam

Which statement regarding valuation in a property policy is NOT true?

1. Under agreed value, the insured and the company establish the value before the loss

2. Under stated amount, the insured does not know what will be paid on a loss until the loss occurs

3. Under stated amount, the insured is guaranteed the limit on the Dec page following a loss

4. Functional replacement is also known as a repair cost

The correct answer is: Under stated amount, the insured is guaranteed the limit on the Dec page following a loss

The statement that under stated amount, the insured is guaranteed the limit on the Dec page following a loss, is not true because this type of coverage does not guarantee that the full amount stated will be paid in the event of a loss. Instead, it generally means that if the insured property is damaged, the company will pay the lesser of the actual cash value of the property, the limit shown in the declaration page, or the amount necessary to repair or replace it. In contrast, under agreed value, the insured and the insurer pre-determine the value of the property before any loss occurs, which provides certainty in the valuation process. With stated amount, the insured is aware that although there may be a limit shown on the declaration page, the final payout may differ based on the actual valuation of the loss at the time it occurs. Functional replacement, on the other hand, refers to a method of valuation where the insurer pays for the cost to replace the damaged property with something similar that serves the same purpose, rather than providing a full replacement cost which might involve a completely new item. Thus, the nature of stated amount coverage is that the insured may not receive the total amount shown in the declaration unless certain conditions are met.