Which basis for purchasing insurance is defined as the cost to replace the property today with new materials of like kind and quality?

Which basis for purchasing insurance is defined as the cost to replace the property today with new materials of like kind and quality?

• A. Replacement approach
• B. Market value approach
• C. Cash value approach
• D. Agreed value approach

Answer: (A)

Replacement approach This basis uses the cost to replace the property today with new materials of like kind and quality. In other words, it aims to cover the current replacement cost, not factoring in depreciation. That’s why it’s different from cash value, which deducts depreciation; market value, which reflects what the property would fetch on the open market; and agreed value, which is a pre-set amount regardless of actual replacement costs.

Replacement approach

This basis uses the cost to replace the property today with new materials of like kind and quality. In other words, it aims to cover the current replacement cost, not factoring in depreciation. That’s why it’s different from cash value, which deducts depreciation; market value, which reflects what the property would fetch on the open market; and agreed value, which is a pre-set amount regardless of actual replacement costs.