Tutorial

1. a. How does the concept of actual cash value support the principle of indemnity?

Insureds are indemnified when they are restored to approximately the same financial position they were in before the loss occurred. Actual cash value, which is defined as replacement cost less depreciation, supports the principle of indemnity because it is designed to prevent profiting from insurance.

b. What is a valued policy? Why is it used?

A valued policy pays the face amount of insurance in the event of a total loss. Valued policies are used to insure valuable property, such as antiques, fine arts, rare paintings, and family heirlooms. Because of the difficulty of determining the actual value of the property at the time of loss, the insured and insurer both agree on the value of the property when the policy is first issued.

c. What is a replacement cost policy

Replacement cost insurance means there is no deduction for depreciation in determining the amount paid for a loss.

d. Ashley purchased a dining room set for $5000 and insured the furniture on an actual

cash value basis. Three years later, the set was destroyed in a fire. At the time of loss, the

property had depreciated in value by 50 percent. The replacement cost of a new dining

room set at the time of loss was $6000. Ignoring any deductible, how much will

Ashley collect from her insurer? Explain your answer.

Actual cash value (ACV) is replacement cost less depreciation. Replacement cost is $6000. Depreciation is $3000 because the dining room set is 50 percent depreciated. Ashley would collect $3000 as shown by the following:

ACV Replacement cost depreciation

= $6000- $300

=$3000

e Nicholas owns a laptop computer that was stolen. The laptop cost $2000 when it was

purchased two years ago. A similar laptop computer today can be purchased for $1800.

Assuming that the laptop was 50 percent depreciated at the time the theft occurred,

what is the actual cash value of the loss?

Actual...