Study guide
4.4 Replacement Cost vs. ACV and Loss Settlement in Homeowners
Arkansas Property & Casualty Insurance State
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1 Standalone Coverage Map
Standalone Coverage Map
2 Introduction: Arkansas Property & Casualty Insurance Exam Overview
Arkansas Property & Casualty Exam Overview
3 National Portion: Insurance Fundamentals
1.1 Risk, Hazards, Perils, and the Law of Large Numbers 1.2 Insurable Interest, Indemnity, and Other Insurance Principles 1.3 Insurance Contract Law and Elements 1.4 Policy Structure: Declarations, Insuring Agreement, Conditions, Exclusions 1.5 Parties, Agents vs. Brokers, and Authority
4 National Portion: Property Insurance Concepts
2.1 Causes of Loss / Named-Peril vs. Open-Peril 2.2 Valuation: ACV, Replacement Cost, and Functional Value 2.3 Coinsurance and the Coinsurance Formula 2.4 Deductibles, Limits, and Loss Settlement 2.5 Common Property Policy Conditions and Clauses
5 National Portion: Dwelling Policies (DP)
3.1 Dwelling Policy Forms DP-1, DP-2, DP-3 3.2 Dwelling Coverages A-E and Other Coverages 3.3 Dwelling Perils, Conditions, and Endorsements 3.4 Mobile Home and Specialized Dwelling Coverage
6 National Portion: Homeowners Policies - Forms & Section I
4.1 Homeowners Forms HO-2 through HO-8 and Eligibility 4.2 Section I Coverages A-D and Additional Coverages 4.3 Section I Perils Insured Against and Exclusions 4.4 Replacement Cost vs. ACV and Loss Settlement in Homeowners
7 National Portion: Homeowners Policies - Section II & Endorsements
5.1 Section II Coverages E (Liability) and F (Medical Payments) 5.2 Homeowners Conditions and Duties After Loss 5.3 Common Homeowners Endorsements (scheduled property, water backup, ordinance or law)
8 National Portion: Personal Auto Policy - Liability & Injury
6.1 Personal Auto Policy Structure and Eligibility 6.2 Part A Liability and Supplementary Payments 6.3 Part B Medical Payments 6.4 Part C Uninsured/Underinsured Motorists
9 National Portion: Personal Auto Policy - Physical Damage & Duties
7.1 Part D: Coverage for Damage to Your Auto 7.2 Exclusions and Part E: Duties After an Accident 7.3 Part F: General Provisions, Endorsements, and No-Fault Concepts
10 National Portion: Liability Insurance Concepts
8.1 Negligence, Torts, and Legal Liability 8.2 Defenses, Damages, and Vicarious Liability 8.3 Occurrence vs. Claims-Made Triggers 8.4 Bodily Injury, Property Damage, and Personal/Advertising Injury
11 National Portion: Commercial Property Insurance
9.1 Commercial Package Policy Structure and Common Policy Conditions 9.2 Building and Personal Property Coverage Form (BPP) 9.3 Causes of Loss Forms (Basic, Broad, Special) 9.4 Business Income and Extra Expense 9.5 Commercial Property Endorsements and the BOP
12 National Portion: Commercial General Liability - Coverages
10.1 CGL Coverage A: Bodily Injury and Property Damage Liability 10.2 CGL Coverage B: Personal and Advertising Injury, Coverage C: Medical Payments 10.3 Who Is an Insured and Supplementary Payments
13 National Portion: Commercial General Liability - Limits, Triggers & Exclusions
11.1 CGL Limits of Insurance and Aggregates 11.2 Occurrence vs. Claims-Made CGL and Retroactive Dates 11.3 Key CGL Exclusions and Endorsements
14 National Portion: Commercial Auto Insurance
12.1 Business Auto Coverage Form and Covered Auto Symbols 12.2 Commercial Auto Liability and Physical Damage 12.3 Motor Carrier / Trucking and MCS-90 12.4 Garage Coverage Form and Garagekeepers 12.5 Commercial Auto Endorsements
15 National Portion: Workers Compensation
13.1 Workers Compensation Statutory Background and Benefits 13.2 Part One (Workers Comp) and Part Two (Employers Liability) 13.3 Premium Basis, Experience Modification, and Classification 13.4 Other States, USL&H, and Federal Acts 13.5 Workers Comp Exclusions and Endorsements
16 National Portion: Other Commercial Lines - BOP, Crime & Marine
14.1 Businessowners Policy (BOP) in Depth 14.2 Crime and Fidelity Coverage 14.3 Inland Marine and Nationwide Marine Definition 14.4 Ocean Marine Coverages (Hull, Cargo, Freight, P&I)
17 National Portion: Other Commercial Lines - Specialty & Professional
15.1 Farm and Agricultural Coverage 15.2 Commercial Umbrella and Excess Liability 15.3 Professional Liability and Errors & Omissions 15.4 Directors & Officers and Employment Practices Liability
18 National Portion: Other Commercial Lines - Surety, Flood & Specialty
16.1 Surety and Fidelity Bonds 16.2 National Flood Insurance Program (NFIP) 16.3 Cyber, Aviation, and Other Specialty Lines
19 National Portion: Insurance Regulation & Market Conduct
17.1 State Regulation, Licensing, and the McCarran-Ferguson Act 17.2 Rates, Forms, Solvency, and Guaranty Associations 17.3 Producer Authority, Fiduciary Duty, and Company Operations
20 National Portion: Ethics & Unfair Trade Practices
18.1 Unfair Trade Practices and Unfair Claims Settlement 18.2 Producer Ethics, Errors & Omissions Exposure, and Fiduciary Conduct 18.3 Privacy, Fraud, and Consumer Protection
21 Chapter 1: Arkansas P&C Insurance Regulation & Licensing
1.1 Arkansas Insurance Department 1.2 Arkansas P&C Producer Licensing Requirements 1.3 Arkansas Producer Responsibilities
22 Chapter 2: Arkansas Property Insurance
2.1 Arkansas Homeowners Insurance 2.2 Arkansas Commercial Property Insurance
23 Chapter 3: Arkansas Casualty & Auto Insurance
3.1 Arkansas Auto Insurance Requirements 3.2 Arkansas Liability Insurance 3.3 Arkansas Workers' Compensation Insurance
24 Chapter 4: Arkansas Ethics & Professional Conduct
4.1 Ethical Practices and Consumer Protection
4.4 Replacement Cost vs. ACV and Loss Settlement in Homeowners
Key Takeaways Explain This Topic AI
ACV = Replacement Cost minus depreciation; RC pays to replace new with no depreciation deduction.
HO buildings (Coverage A/B) settle at replacement cost if the insured carries at least 80% of full RC; contents (Coverage C) settle at ACV unless HO 04 90 is added.
Underinsured partial-loss formula: Payment = (Carried Limit / (0.80 x Full RC)) x Loss, then less deductible, capped at the limit.
Total losses skip the coinsurance math and pay the lesser of the Coverage A limit or replacement cost.
RC building claims are paid on a replacement-cost-incurred basis: ACV first, then the holdback after repairs are completed and documented.
Last updated: June 2026
4.4 Replacement Cost vs. ACV and Loss Settlement in Homeowners
Loss settlement determines how much money the insured actually collects, and it generates more exam math than any other homeowners topic. The two valuation methods are Actual Cash Value (ACV) and Replacement Cost (RC) , and the building loss-settlement clause adds an 80% coinsurance-style requirement that the exam tests with numbers.
ACV vs. Replacement Cost
Replacement Cost (RC) = the cost to repair or replace with new materials of like kind and quality, with no deduction for depreciation .
Actual Cash Value (ACV) = replacement cost minus depreciation . ACV = RC - Depreciation.
In the HO program, the dwelling (Coverage A) and other structures (Coverage B) are settled at replacement cost when the insured carries at least 80% of full RC. Personal property (Coverage C) is settled at ACV by default; RC on contents requires the HO 04 90 (Personal Property Replacement Cost) endorsement.
Worked ACV example
A 12-year-old roof costs $24,000 to replace new. The roof has a 30-year life, so it has depreciated 12/30 = 40%.
- Depreciation = 40% x $24,000 = $9,600
- ACV = $24,000 - $9,600 = $14,400
Under an ACV settlement the insured collects $14,400 (less any deductible). Under RC settlement the insured collects the full $24,000 once the repair is actually completed.
The deductible always comes last
A common exam error is applying the deductible before the valuation or coinsurance math. The correct sequence on a building loss is: (1) determine the loss amount, (2) apply the replacement-cost loss-settlement (80%) calculation if the insured is underinsured, (3) subtract the deductible, and (4) cap the result at the Coverage A limit. On a contents loss, apply ACV (or RC if endorsed), then any applicable special sublimit, then the deductible. Doing the steps out of order produces a wrong dollar answer even when the candidate understands each rule individually.
The 80% Replacement-Cost Loss-Settlement Clause
To earn full RC on a partial building loss, the insured must carry insurance equal to at least 80% of the dwelling's full replacement cost at the time of loss. If they carry less, the payment is the greater of ACV or the amount produced by this formula:
Payment = (Carried Limit / (0.80 x Full RC)) x Loss
(then less the deductible, never exceeding the policy limit). If the insured carries 80% or more, partial losses are paid in full at RC up to the limit.
Worked coinsurance / loss-settlement example
A home has a full replacement cost of $500,000 . The required minimum is 80% x $500,000 = $400,000 . The insured carries only $300,000 (Coverage A). A partial fire loss costs $100,000 to repair; the deductible is $1,000 .
- Did/should ratio = $300,000 / $400,000 = 0.75
- RC payment = 0.75 x $100,000 = $75,000
- Less deductible: $75,000 - $1,000 = $74,000
The insured eats the $25,000 penalty for being underinsured. Had they carried $400,000+, the policy would have paid the full $100,000 - $1,000 = $99,000.
Total losses and other rules
On a total loss , the coinsurance math does not run; the policy pays the lesser of the Coverage A limit or the cost to replace.
RC building settlement is paid on a replacement-cost-incurred basis: the insurer first pays ACV, then the holdback (RC minus ACV) once repairs are completed and receipts submitted.
Many states require state-specific Valued Policy Laws that override coinsurance on total fire losses — but that is a state-portion topic, not national.
- Property Default HO Settlement RC Endorsement
- Dwelling (A) / Other Structures (B) Replacement cost (if 80%+) Built in
- Personal property (C) ACV HO 04 90
Inflation guard and guaranteed/extended replacement cost
Because construction costs rise, an underinsured insured can drift below the 80% threshold without realizing it. Carriers offer an inflation guard endorsement that automatically raises Coverage A periodically. For high-value homes, guaranteed replacement cost pays the full rebuild even if it exceeds the Coverage A limit, while extended replacement cost adds a buffer (commonly 25%) above the limit. The exam contrasts these: guaranteed RC has no cap; extended RC caps the cushion at a stated percentage; basic RC stops at the policy limit.
Why depreciation matters to the client
The gap between ACV and RC is the depreciation the insured absorbs at the moment of loss before any repair is completed. On older roofs, HVAC systems, and personal property, that gap can be large — a 15-year-old roof may have lost half its value. Producers should counsel clients to add the HO 04 90 contents replacement-cost endorsement and to insure the dwelling to at least 80%, ideally 100%, of full replacement cost. The exam frames this as a suitability question: failing to recommend RC coverage when the client could afford it is a service gap, not merely a price decision.