General Insurance PrinciplesQuestion 181 of 474
A five-year-old laptop is destroyed by a covered fire. It would cost $1,200 to replace and its actual cash value is $700. Under an actual cash value policy with a $250 deductible, the insurer pays:
a.$450
b.$1,200
c.$700
d.$950
Explanation
Indemnity restores the insured to the same financial position as before the loss, not a better one. Actual cash value here is $700, and subtracting the $250 deductible leaves $450. Paying the full $1,200 replacement cost would hand the insured a new machine in place of a five-year-old one, which is the profit that the actual cash value basis exists to prevent.
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