P&CTexasmedium
An insured's 10-year-old roof is destroyed by hail. The insurer pays actual cash value (ACV) rather than replacement cost. Which insurance principle best explains why an ACV settlement does NOT pay full replacement cost?
ASubrogation — the insurer recovers from the at-fault manufacturer
Indemnity — the insured should be restored to their pre-loss position, not placed in a better position
CUtmost good faith — the insured must disclose the roof age at application
DInsurable interest — interest is limited to the roof's current market value
Why this is the answer
The principle of indemnity prohibits the insured from profiting from a loss. A 10-year-old roof has depreciated significantly from its original cost. If an ACV policy paid full replacement cost, the insured would receive a brand-new roof for free — a net gain. ACV (replacement cost minus depreciation) restores the insured to their financial position immediately before the loss, consistent with indemnity. Replacement cost coverage, whether built into the form or added by endorsement, departs from strict indemnity, and insurers charge for it.
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