Canadian Accredited Insurance Broker (CAIB) Two Practice Exam

The distinction between "actual cash value" and "replacement cost" is essential in property insurance, particularly regarding how losses are evaluated and compensated.

Actual cash value is defined as the replacement cost of an item minus depreciation. This means that, when an insured property is damaged or lost, the insurer will reimburse the policyholder for the current market value of the item at the time of the loss, which takes into account any wear and tear or reduction in value due to age. Therefore, if you had a ten-year-old roof that needed replacing, the actual cash value payout would reflect its worth before the incident, not the brand-new cost.

On the other hand, replacement cost refers to the amount needed to replace the damaged property with a new equivalent item without taking depreciation into account. This represents the cost of purchasing a brand new item similar to the one that was lost or damaged, regardless of its current value or age.

This clear distinction helps policyholders understand what type of coverage they have and the potential payout they could receive in the event of a claim. Understanding this difference is crucial for assessing coverage needs and for making informed decisions about property insurance policies.