Washington State Insurance Practice Exam

What is one characteristic of actual cash value coverage?

1. It offers no depreciation in payment

2. It pays for complete repairs regardless of depreciation

3. It only covers damages not resulting from accidents

4. It pays for an item’s replacement cost minus depreciation

The correct answer is: It pays for an item’s replacement cost minus depreciation

Actual cash value coverage is characterized by its method of calculating the compensation owed for a covered loss. This calculation involves determining the replacement cost of the item at the time of loss and then deducting depreciation. Depreciation accounts for the physical wear and tear or loss in value of the item over time. Therefore, the correct answer reflects this critical aspect whereby the policy pays the replacement cost of the damaged item, less any depreciation. This method ensures that policyholders are compensated fairly for their loss based on the current value of the item rather than its original purchase price, aligning compensation with its actual market value at the time of the incident.