Registered Insurance Brokers of Ontario (RIBO) Practice Exam

How would you define 'actual cash value' in comparison to 'replacement cost'?

1. Actual cash value is higher than replacement cost

2. Actual cash value considers depreciation

3. Replacement cost considers depreciation

4. They are the same value

The correct answer is: Actual cash value considers depreciation

The definition of 'actual cash value' distinctly incorporates the concept of depreciation, which is central to understanding this valuation method. Actual cash value generally refers to the amount it would take to replace an asset minus depreciation. This means that actual cash value reflects not just the current market value but also takes into account the wear and tear or age of the item, giving a more realistic view of its worth in the present context. In contrast, 'replacement cost' focuses solely on the cost to replace the item with a new one of similar kind and quality, without consideration for depreciation. Thus, replacement cost is typically higher since it does not account for the reduction in value over time. The other options do not accurately capture the definitions or the relationships between these two types of valuations. Recognizing that actual cash value includes depreciation helps to clarify why this understanding is pivotal in insurance contexts, particularly when assessing claims for damaged or lost property.