Darla purchased an unendorsed Homeowners 3 policy.While the policy was in force,a fire occurred that destroyed a living room set.The living room set cost $4,000 new,but was 25 percent depreciated when the loss occurred.Replacement furniture will cost $4,400.Assuming no deductible,how much will Darla receive from her insurer?
A)$3,000
B)$3,300
C)$3,400
D)$4,400

Question

Quizplus · Accepted Answer

Since Darla's policy is unendorsed, the loss settlement will be based on actual cash value (ACV). ACV is the cost to replace or repair the damaged property, with some deduction for depreciation. The living room set is depreciated by 25%, which means it has a current value of 75% of its original cost. Therefore, Darla will receive $3,000 (75% of $4,000) for the loss of her living room set. However, Darla can also choose to replace the damaged property and be reimbursed for the replacement cost (RC). In this case, the RC is $4,400. Darla will receive the lesser of the two amounts, which is $3,300 ($3,000 for ACV and $400 for the additional cost of replacing with new property).

Darla Purchased an Unendorsed Homeowners 3 Policy