Washington State Insurance Practice Exam

What type of coverage does "replacement cost" provide?

1. Payment based on depreciation

2. Payment for repairs only

3. Payment based on current market value

4. Payment for the cost of replacing an item without depreciation

The correct answer is: Payment for the cost of replacing an item without depreciation

Replacement cost coverage is designed to provide payment for the cost of replacing a damaged or lost item without factoring in depreciation. This means that when an insured item is lost, stolen, or damaged, the policy will pay the amount it would cost to purchase a new item that is similar to the one that was lost or destroyed at current market prices. This type of coverage is particularly beneficial for policyholders, as it allows them to restore their property to its original condition without suffering a financial loss due to depreciation that typically occurs over time. In contrast, payment based on depreciation would lower the payout amount as it takes into account the wear and tear or age of the item. Payment for repairs only would limit the coverage to only the necessary costs to fix an item rather than replacing it entirely. Lastly, payment based on current market value assesses the worth of an item in its used condition rather than focusing on the cost to replace it with a new one, which could potentially result in a less favorable outcome for the policyholder.