South Carolina Personal Lines Practice Exam

In a Basic Form, how are losses settled?

1. Replacement cost

2. Actual cash value

3. Full value

4. Market value

The correct answer is: Actual cash value

In a Basic Form, losses are settled using the Actual Cash Value (ACV) method. This approach takes into account the replacement cost of the damaged property minus depreciation. Depreciation reflects the decrease in value due to age, wear and tear, or obsolescence, which means the homeowner or insured is compensated for what the item is worth at the time of loss rather than what it would cost to replace it with a new item. This method is significant because it provides a more realistic valuation that factors in the property's condition at the time of the loss. Therefore, when a loss occurs, the insured generally receives an amount that corresponds to the value of the property at that moment, ensuring that they do not receive more than what they lost. Given this context, the Actual Cash Value settlement method is the standard approach used in Basic Form insurance policies.