Washington State Insurance Practice Exam

Which loss valuation method involves replacing damaged property with less expensive and more modern construction or equipment?

1. Actual Cash Value

2. Functional Replacement Cost

3. Market Value

4. Replacement Cost

The correct answer is: Functional Replacement Cost

Functional Replacement Cost involves replacing damaged property with less expensive and more modern construction or equipment. This method takes into consideration the cost of replacing the damaged property with items that are functionally equivalent to the original property, but possibly more cost-effective and modern. Actual Cash Value (ACV) is the cost to replace damaged property minus depreciation, Market Value is the price at which property would sell in a competitive market, and Replacement Cost is the cost to replace damaged property with like kind and quality without considering depreciation.