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Insurance · General

What is 'replacement cost' coverage?

Correct answer

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

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

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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