Washington State Insurance Practice Exam

What does "actual cash value" coverage consider when making a payment?

1. The insured item's market value prior to loss

2. The replacement cost minus depreciation

3. The estimated future value of the insured item

4. The repair costs incurred by the claimant

The correct answer is: The replacement cost minus depreciation

"Actual cash value" coverage is designed to provide a payout that reflects the fair value of the insured item at the time of the loss. This concept takes into account the replacement cost of the item—meaning how much it would cost to replace the item with a new one of similar kind and quality—while also factoring in depreciation. Depreciation accounts for the loss in value due to age, wear and tear, and obsolescence. Therefore, when an insurer calculates the actual cash value, they subtract the accumulated depreciation from the replacement cost. This method ensures that the insured receives a payment that accurately reflects the current value of the item rather than simply a replacement cost or an inflated future value. This approach is particularly relevant for items that may have significantly decreased in value over time. Other options do not align with how actual cash value is determined. For instance, assessing market value prior to the loss may not reflect depreciation appropriately, while estimated future value does not consider current conditions or depreciation. Repair costs do not correlate with actual cash value but instead pertain to the expense incurred to fix damages, which is a different coverage aspect.