Washington State Insurance Practice Exam

Which valuation method might result in an insurance settlement that exceeds the property’s actual cash value?

1. Actual Cash Value

2. Functional Replacement Cost

3. Guaranteed Replacement Cost

4. Replacement Cost

The correct answer is: Replacement Cost

Replacement Cost is an insurance valuation method that determines the cost to replace a damaged or destroyed property with a new, similar property. This valuation method might result in an insurance settlement that exceeds the property's actual cash value because it does not take into account depreciation and the market value of the property. This means that the insurance payout could potentially cover the cost of replacing the property at its original or current market value, rather than just the depreciated value. Therefore, options A, B, and C are incorrect because they either involve considering depreciation, using a functional replacement cost, or a guaranteed replacement cost that may not fully cover the cost of replacement. Option D, Replacement Cost, fits the given context and is the most accurate answer.