DP Coverage A and B in DP 1 is settled at which valuation method?

The correct answer is based on the valuation method used for Coverage A (dwelling) and Coverage B (other structures) in a DP 1 (Dwelling Policy – Basic Form). In this type of policy, these coverages are settled using the Actual Cash Value (ACV) method.

The Actual Cash Value is determined as the replacement cost of the property at the time of loss minus depreciation. This means that when a claim is made, the insured would receive an amount that reflects the current value of the property considering its age and wear and tear rather than the cost to replace it with a brand-new item. This is particularly significant in a basic form policy like DP 1, which is designed to provide limited coverage and often covers more basic risks and exposures.

Using replacement cost would imply that the insurer pays for the cost to replace the damaged property without deducting for depreciation, which is not how DP 1 operates. Fair market value, which reflects what a willing buyer would pay, is not how settlements are approached in this context either, as it's not a direct measure of current assets under a covered loss but rather a broader economic concept. Depreciated value refers to a calculation that includes wear and tear, but this term is not as