State Farm Fire Independent Policy Practice Exam

In the HO-3 policy, claim payment for repaired Coverage A items is based on which of the following amounts?

1. Salvage value

2. Replacement cost

3. Market value

4. Actual cash value

The correct answer is: Replacement cost

In an HO-3 policy, which is a commonly used homeowners insurance policy, claim payment for repaired items under Coverage A (which covers the dwelling itself) is based on replacement cost. This means that when a covered loss occurs and repairs are necessary, the insurer will compensate the homeowner for the cost to repair or replace the damaged property without considering depreciation. Replacement cost is significant in this context because it reflects the current cost of constructing a similar structure using new materials, rather than deducting for wear and tear, which is typically the case with actual cash value approaches. This ensures that the homeowner can effectively restore their property to its pre-loss condition. Other methods, such as market value or salvage value, do not apply in this scenario. Market value is concerned with the overall worth of the property in a real estate context, while salvage value pertains to what can be recouped from the remaining value of damaged items. Actual cash value, which is essentially replacement cost minus depreciation, would not provide the same level of financial support to the homeowner for repairs and is thus not applicable under the HO-3 policy for Coverage A claims.