Your home insurance provides for replacement value for personal property losses. A microwave is stolen. It cost $306 two years ago and has an expected life of six years. A comparable microwave costs $423 today. What amount will the insurance company pay?

Question

Rayne Harmon

Business

8 August, 12:23

Your home insurance provides for replacement value for personal property losses. A microwave is stolen. It cost $306 two years ago and has an expected life of six years. A comparable microwave costs $423 today. What amount will the insurance company pay?

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Answers (1)

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Fowler · Answer 1

Answer: The insurance company will pay the present price of $423.

Explanation:

The goal of insuring a property is not to gain or lose money, it is about returning whatever property was insured to its previous state before the property was damaged or stolen.

That being said, because the insurance policy provides for replacement value, then when the microwave gets stolen, the insurance company is bound to pay the cost of a new and similar microwave oven.

In the scenario given above, the insurance company has to pay a higher amount, but this is not always the case, because sometimes the value of an item might decrease over time, and therefore, the replacement value will be lower.