Question

An insured's roof cost $4,000 when installed 5 years ago. It has been damaged by hail and must be replaced. The new roof will cost $6,000 at today's prices. If the roof has been depreciating at $200 per year and his policy is ACV, how much will it pay toward the insured's new roof?

1) $1,000
2) $4,000
3) $5,000
4) $6,000

Answer 1

The insured's policy will pay $3,000 towards the insured's new roof.

Step-by-step explanation:

To determine how much the insured's policy will pay towards the new roof, we need to calculate the Actual Cash Value (ACV) of the roof. The ACV takes into account the depreciation of the roof over the 5 years. The depreciation amount per year is $200, so over 5 years, the total depreciation is $200 x 5 = $1000.

The original cost of the roof was $4,000, so the ACV is $4,000 - $1,000 = $3,000. However, the insured's policy is ACV, so it will only pay for the depreciated value of the roof. Therefore, the insured's policy will pay $3,000 towards the insured's new roof.