2.2 Valuation: ACV, Replacement Cost, and Functional Value

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

2.2 Valuation: ACV, Replacement Cost, and Functional Value

Key Takeaways Explain This Topic AI

Actual Cash Value (ACV) = Replacement Cost minus depreciation; it leaves the insured bearing the depreciation gap on aging property.

Replacement Cost (RC) pays the full cost to repair or replace with like kind and quality WITHOUT deduction for depreciation, subject to the limit.

RC settlements are paid on a recovery basis: the insurer first pays ACV, then the holdback once repair/replacement is actually completed.

Functional Replacement Cost replaces with functionally equivalent (often less costly) materials — common for older or obsolete buildings.

Agreed Value and Stated Value fix the loss amount in advance and are used where ACV is hard to determine, such as fine arts or antiques.

Last updated: June 2026

The Valuation Question

Every property claim must answer one question: how much is the damaged property worth for settlement? The valuation basis is chosen on the declarations and dramatically changes the payout. The four methods candidates must distinguish are Actual Cash Value , Replacement Cost , Functional Replacement Cost , and Agreed/Stated Value .

Method What It Pays Typical Use
ACV Replacement cost − depreciation Default for personal property, older buildings
Replacement Cost Full cost to replace, no depreciation Dwellings, modern commercial buildings
Functional RC Equivalent but cheaper materials Obsolete or historic structures
Agreed / Stated Value A pre-agreed dollar amount Fine arts, antiques, collectibles

Actual Cash Value
The most-tested definition on the exam: Actual Cash Value = Replacement Cost − Depreciation

Depreciation reflects age, wear, and obsolescence. A 15-year-old roof with a 20-year life is 75% through its useful life, so roughly 75% is depreciated. Most states define ACV as replacement cost minus depreciation, though a minority follow the broad evidence rule (consider all factors a buyer/seller would) or fair market value .

Worked numeric: A roof costs $20,000 to replace today. It is 15 years into a 20-year life.

Depreciation = 75% × $20,000 = $15,000
ACV = $20,000 − $15,000 = $5,000

Under ACV the insured receives only $5,000 and must fund the $15,000 gap out of pocket.

Replacement Cost and the Holdback

Replacement Cost (RC) pays the full cost to repair or replace with material of like kind and quality , with no deduction for depreciation , up to the policy limit. For the same $20,000 roof, RC pays the full $20,000.

The catch is the recovery (holdback) provision . To prevent profit and moral hazard, the insurer first pays the ACV ($5,000 in the example), and pays the remaining depreciation holdback ($15,000) only after the insured actually completes the repair or replacement and submits proof. An insured who never rebuilds keeps only the ACV.

Exam trap: RC coverage does not let you pocket cash for a loss you never fix. The holdback is released on a recovery basis after the work is done.