Question

1. After investing hours in preparation, you are taking a 4-hour P&C insurance license exam. Your next question indicates that the building and personal property insurance form provides several optional coverages. Which optional coverage provides that no deduction is taken for depreciation when settling a covered loss?

   	1.	extra expense.
   	2.	agreed value.
   	3.	replacement cost.
   	4.	inflation guard.

Answer 1

The correct answer is "Option 3: Replacement Cost."

Explanation:
Let's understand the basic meaning of all the coverage options:

1. Extra Expense - This cover provides the policyholder with cash to help the holder stay in the business till the things settle down or the property is replaced or repaired. It helps to prevent any permanent shutdown in case of major losses.
2. Agreed Value - In this, the insurance company and the policyholder decides the value of the particular asset, i.e. how much would it worth for? Because of this, the policyholder is guaranteed to receive the full amount as decided or stated in the policy in case of any loss.
3. Replacement Cost - It is defined in the policy, as how much the replacement cost would be. In general, it is the cost to replace the damaged property with comparable material and quality, without any deduction of depreciation.
4. Inflation Guard - This provision increases the insurance limit to take effect of inflation. It is gradually increased at a specified rate for a specified period as mention in the policy, say 2% for every 3 months.

Therefore, Replacement Cost Coverage is the only cover where Depreciation effect is not taken for settling any loss.