Homeowners Policy – Section I: Property Coverages Practice Test

Losses to personal property under a homeowners policy are primarily handled at actual cash value (ACV). This method assesses the value of the property by taking into account its age, condition, and depreciation at the time of the loss. Essentially, it calculates how much the property was worth just before the loss occurred, providing a fair compensation that reflects the decrease in value due to wear and tear over time.

Using actual cash value ensures that homeowners receive a settlement that correlates with what their belongings are truly worth in their current state, rather than what it would cost to replace them with new items. This is an important distinction because the amount required to replace personal property with new items, at replacement cost, typically would be higher than the actual cash value, which accounts for depreciation.

The other valuation methods, such as depreciated value and market value, do not align with the standard practice of using actual cash value in homeowners insurance policies. Depreciated value is akin to what actual cash value represents, but it is not a term commonly used in this context. Market value can fluctuate based on external factors and does not necessarily reflect the insured's loss.