Property Insurance FundamentalsQuestion 259 of 531
A commercial flat roof would cost $48,000 to replace today. It has a 20-year expected life, it was 15 years old when a covered windstorm destroyed it, and the policy settles building losses on an actual cash value basis with no deductible. What does the insurer pay?
a.$12,000
b.$48,000
c.$24,000
d.$36,000
Explanation
Actual cash value is replacement cost minus depreciation. The roof had used 15 of its 20 years, so 75 percent of its life was gone: $48,000 x 0.75 = $36,000 of depreciation, leaving $48,000 - $36,000 = $12,000. Paying the full $48,000 would be a replacement cost settlement, and $36,000 is the depreciation itself rather than the value that remained.
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