Property and Casualty Insurance Practice Exam

What basis are losses paid on under flood insurance policies?

1. Replacement cost basis

2. Actual cash value basis

3. Estimated value basis

4. Market value basis

The correct answer is: Actual cash value basis

Flood insurance policies typically pay losses based on the actual cash value basis. This approach means that claims are settled by determining the replacement cost of the damaged property, then subtracting depreciation to reflect the property's current value before the loss occurred. The actual cash value is essentially what a policyholder could expect to receive for the property if it were sold or replaced at the time of the loss, taking into account factors such as age and condition. This basis of payment is important because it ensures that the insured receives compensation that reflects the true value of their property rather than a potentially inflated replacement cost that may not accurately represent its worth after depreciation. The other options are not applicable for flood insurance claims: - The replacement cost basis would cover the total cost to replace the property with new materials without considering depreciation, which is not how flood policies operate. - Estimated value basis is not a standard term used in insurance and does not specify a method for determining compensation. - Market value basis would refer to the price at which the property could be sold, which may differ from actual cash value and could lead to discrepancies in compensation based on market fluctuations. Thus, the actual cash value basis aligns with the method of loss payment under flood insurance policies, ensuring fair compensation reflective of the