Georgia Property & Casualty Practice Exam

What basis did the insurance company use to value the damage to Mr. Huan's piano?

1. Replacement value

2. Market value

3. Actual cash value

4. Agreed value

The correct answer is: Actual cash value

The insurance company used the actual cash value basis to value the damage to Mr. Huan's piano, which is defined as the replacement cost minus depreciation. This method takes into consideration both the current market value of the item and its age, wear, and tear. When an insurance company values a damaged item using actual cash value, it seeks to provide compensation that reflects what the owner would realistically receive if they were to sell the item in its current condition. This is particularly relevant for items like a piano, which can lose value over time due to usage and other factors. In contrast, replacement value would refer to the cost to replace the piano with a new one of similar kind and quality, which does not account for depreciation. Market value would look at what the item could sell for on the open market, but this can be subjective and vary widely based on conditions. Agreed value is typically used in specialized insurance policies where the insurer and the insured agree on a specific value for the item, which is not applicable here. Thus, the actual cash value approach is the most appropriate for determining compensation in this scenario.