Property and Casualty Insurance Practice Exam

Under a Boatowners/Watercraft Package Policy, losses are paid on what basis?

1. Replacement cost basis

2. Market value basis

3. Actual cash value basis

4. Full coverage basis

The correct answer is: Actual cash value basis

In a Boatowners/Watercraft Package Policy, losses are typically paid on an actual cash value (ACV) basis. This means that when a covered loss occurs, the insurer calculates the payout based on the replacement cost of the damaged property minus depreciation. Depreciation takes into account the age, wear and tear, and condition of the item at the time of the loss. This approach is common in property and casualty insurance as it provides a fair payment to the insured without overcompensating for the loss. It reflects the true value of the property at the time of the incident rather than what it would cost to replace it with a new item or for its original purchase price. Other payment methods, like replacement cost or market value, would provide different forms of compensation, but in the context of a Boatowners/Watercraft Package Policy, the actual cash value basis is the standard.