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Insurance · Claims and Loss Settlement

What is 'replacement cost' coverage?

Reviewed by Jordan Morley, Editorial Lead at 247SimpleTests. Written by the 247SimpleTests Editorial Team from the official source material cited on every question.

Correct answer

The cost to replace the damaged property with new property of like kind and quality — without deducting for depreciation

  1. A The assessed value for tax purposes
  2. B The cost to replace the damaged property with new property of like kind and quality — without deducting for depreciation
  3. C Current market value of the property
  4. D The insured's purchase price

Why this is the answer

Replacement Cost Value (RCV) pays the cost to replace damaged property with new property of similar kind and quality — WITHOUT deducting for depreciation. This is more favorable than Actual Cash Value (ACV), which deducts depreciation. Example: a 10-year-old roof destroyed by hail. ACV would pay $8,000 (after depreciation). RCV would pay $15,000 (the cost of a new roof). RCV policies typically require the insured to actually replace the property to receive the full RCV — the insurer pays ACV first, then releases the recoverable depreciation when repair/replacement is complete and documented.
Source: Property Insurance Exam, Replacement Cost

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About this topic: Claims and Loss Settlement

Claims and loss settlement questions cover the insured's duties after a loss, actual cash value versus replacement cost, the coinsurance formula, deductibles, appraisal and subrogation. This is one of 11 Property Insurance questions on claims and loss settlement, each with a full explanation on a single study page.

New to this exam? Our Insurance exam guide explains the format, scoring, and how to prepare.

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