Alabama Insurance Adjuster Practice Exam

Which term best describes the process by which covered losses are paid under Equipment Breakdown protection?

1. Replacement cost basis

2. Actual cash value basis

3. Depreciated value basis

4. Restoration value basis

The correct answer is: Replacement cost basis

The process by which covered losses are paid under Equipment Breakdown protection is best described by the replacement cost basis. This term refers to the principle where claims are settled based on the cost to replace damaged or destroyed equipment with new equipment of like kind and quality, without deducting for depreciation. This approach ensures that the insured can acquire new equipment that meets their operational needs without experiencing a financial loss due to depreciation of the old equipment. Replacement cost coverage is particularly important in the context of Equipment Breakdown protection, as the purpose of this insurance is to ensure that businesses can quickly and effectively resume operations after a covered loss. By providing the full replacement cost, it eliminates the financial burden that comes from having to account for depreciated values.