Registered Insurance Brokers of Ontario (RIBO) Practice Exam

What must be determined when there is a co-insurance clause in a replacement cost policy?

1. The insurance company’s profit margin

2. The replacement cost of the property

3. The deductible amount for the policy

4. The age of the property

The correct answer is: The replacement cost of the property

The correct choice is indeed focused on determining the replacement cost of the property when a co-insurance clause is present in a replacement cost policy. The co-insurance clause typically requires the insured to carry a certain percentage of the property's value as insurance to receive full coverage in the event of a loss. If the property is underinsured, the insured may not receive sufficient compensation for a loss, which makes understanding the true replacement cost crucial. In a co-insurance scenario, determining that replacement cost allows both the insurer and insured to ensure compliance with the policy's terms. It also helps in assessing the appropriate coverage needed to avoid penalties related to any underinsurance. This becomes especially important in the case of significant losses when the insured may be liable for a portion of the damage if they did not meet the required insured amount. While considering other aspects such as profit margins, deductibles, or the age of the property can all contribute to understanding insurance costs and risks, they are not the primary factor that needs to be determined concerning the co-insurance requirement in a replacement cost policy. The accurate assessment of the property's replacement cost is essential to ensure adequate coverage and avoid financial penalties during a claim.