Los Angeles Claims Adjuster Property and Causality Practice Exam

What term describes a combination of replacement cost minus depreciation and fair market value?

1. Broad evidence rule

2. Actual cash value

3. Replacement cost

4. Valued policy law

The correct answer is: Broad evidence rule

The correct term that describes a combination of replacement cost minus depreciation and fair market value is known as actual cash value. This concept is crucial in the insurance claims process, particularly when determining the compensation for damaged or lost property. Actual cash value is calculated as the cost to replace the property minus any depreciation, which reflects the wear and tear or obsolescence of the item. This method recognizes that while a property may need replacing, its current value is less than the cost needed to replace it due to these factors. Additionally, the fair market value represents the price at which the property would sell in the open market. Combining these elements provides a more accurate assessment of the item's worth at the time of the loss. It's important to distinguish this term from others like the broad evidence rule, which allows for considering various types of evidence when determining the value of an insured item, and the valued policy law, which provides a specified amount of coverage for specific types of property. While replacement cost refers to the cost to replace or repair the property without deducting depreciation, actual cash value encompasses both replacement costs adjusted for depreciation and fair market value, making it the most suitable term in this context.