RMIN EXAM 3 QUESTIONS AND
ANSWERS
Principle of Indemnity - ANS The insurer agrees to pay no more than the actual amount of
the loss
Helps to prevent moral hazard
Replacement Cost (RC) - ANS The cost to replace property with an item of like kind
and quality (similar workmanship and materials).
• Not the same as historical cost!
Actual Cash Value (ACV) - ANS Replacement Cost less depreciation.
• In property insurance, indemnification is usually
based on the actual cash value of the property at the
time of loss.
ACV= RC- Depreciation
Depreciation = Age/useful life
what is the Value - ANS Roof installed in 2012 for $5,000 (historical cost), has a useful life of
20 years.
• Will cost $6,000 to replace based on current costs (replacement cost).
Copyright ©2025 BRIGHTSTARS ALL RIGHTS RESERVED 1
,• After depreciation, the
actual cash value is $3,600. Depreciation is 40% (8 years old / 20 year useful lifespan
What is the ACV?
Samsung 50" TV
• Cost $750 when purchased in 2016.
• Useful life is 10 years
• Current model (like kind/quality) is $450. - ANS depreciation= 4/10 = 40%
$450- (40%*450) = $270
What is the ACV?
Warehouse Building
• Cost $250,000 when built in 2014.
• Useful life of 20 years
• Fire completely destroys building in 2020
• Current reconstruction cost is $300,000 - ANS dep= 6/20= 30%
$300,000* 70% =
$210,000
not enough to rebuild that building
Other Types of Indemnity - ANS Market value
Valued Policy
Valued Policy (in some states)
market value - ANS Price a buyer would be willing to pay in a free market.
Copyright ©2025 BRIGHTSTARS ALL RIGHTS RESERVED 2
,Valued Policy - ANS a policy that pays the face amount of insurance if a total loss occurs (life
insurance)
Valued Policy (in some states) - ANS Requires payment of the face amount of insurance if a
total loss to real property occurs from a peril specified in law.
on real property only
Principle of Insurable Interest - ANS The insured/beneficiary must be in a position to
lose financially if a covered loss occurs.
•Why?
oPrevents gambling on losses.
oReduces moral hazard.
Examples of Insurable Interest - ANS Ownership of property (house, car)
• Potential legal liability (business owner)
• Secured creditors (mortgage company, auto lender)
• Contractual right (goods in transit)
When Must an Insurable Interest
Exist? - ANS Property Insurance
• At time of loss.
• Can't collect on an insurance policy after you sell your
home.
Life Insurance
• At inception of policy.
Copyright ©2025 BRIGHTSTARS ALL RIGHTS RESERVED 3
, • Ex-spouse can still collect on life insurance if listed as
policy beneficiary.
Principle of Subrogation - ANS Substitution of the insurer in place of the insured
for the purpose of claiming indemnity from a third-
party loss covered by insurance.
Example
• Someone else hits your car.
• Your insurance company pays you for the damages to
your vehicle.
• Your insurance company sues the other driver for
reimbursement
Reasons for Subrogation - ANS Prevents insured from collecting twice (once
from insurer, once from responsible party).
• Holds the negligent party responsible for the
loss.
• Reduces insurance claims costs (and therefore,
rates)
Principal of utmost good faith - ANS A higher degree of honesty is imposed on both parties
to an insurance contract than is imposed on parties to other contracts
supported by three legal doctrines
-representations
-concealment
-warranty
Copyright ©2025 BRIGHTSTARS ALL RIGHTS RESERVED 4
ANSWERS
Principle of Indemnity - ANS The insurer agrees to pay no more than the actual amount of
the loss
Helps to prevent moral hazard
Replacement Cost (RC) - ANS The cost to replace property with an item of like kind
and quality (similar workmanship and materials).
• Not the same as historical cost!
Actual Cash Value (ACV) - ANS Replacement Cost less depreciation.
• In property insurance, indemnification is usually
based on the actual cash value of the property at the
time of loss.
ACV= RC- Depreciation
Depreciation = Age/useful life
what is the Value - ANS Roof installed in 2012 for $5,000 (historical cost), has a useful life of
20 years.
• Will cost $6,000 to replace based on current costs (replacement cost).
Copyright ©2025 BRIGHTSTARS ALL RIGHTS RESERVED 1
,• After depreciation, the
actual cash value is $3,600. Depreciation is 40% (8 years old / 20 year useful lifespan
What is the ACV?
Samsung 50" TV
• Cost $750 when purchased in 2016.
• Useful life is 10 years
• Current model (like kind/quality) is $450. - ANS depreciation= 4/10 = 40%
$450- (40%*450) = $270
What is the ACV?
Warehouse Building
• Cost $250,000 when built in 2014.
• Useful life of 20 years
• Fire completely destroys building in 2020
• Current reconstruction cost is $300,000 - ANS dep= 6/20= 30%
$300,000* 70% =
$210,000
not enough to rebuild that building
Other Types of Indemnity - ANS Market value
Valued Policy
Valued Policy (in some states)
market value - ANS Price a buyer would be willing to pay in a free market.
Copyright ©2025 BRIGHTSTARS ALL RIGHTS RESERVED 2
,Valued Policy - ANS a policy that pays the face amount of insurance if a total loss occurs (life
insurance)
Valued Policy (in some states) - ANS Requires payment of the face amount of insurance if a
total loss to real property occurs from a peril specified in law.
on real property only
Principle of Insurable Interest - ANS The insured/beneficiary must be in a position to
lose financially if a covered loss occurs.
•Why?
oPrevents gambling on losses.
oReduces moral hazard.
Examples of Insurable Interest - ANS Ownership of property (house, car)
• Potential legal liability (business owner)
• Secured creditors (mortgage company, auto lender)
• Contractual right (goods in transit)
When Must an Insurable Interest
Exist? - ANS Property Insurance
• At time of loss.
• Can't collect on an insurance policy after you sell your
home.
Life Insurance
• At inception of policy.
Copyright ©2025 BRIGHTSTARS ALL RIGHTS RESERVED 3
, • Ex-spouse can still collect on life insurance if listed as
policy beneficiary.
Principle of Subrogation - ANS Substitution of the insurer in place of the insured
for the purpose of claiming indemnity from a third-
party loss covered by insurance.
Example
• Someone else hits your car.
• Your insurance company pays you for the damages to
your vehicle.
• Your insurance company sues the other driver for
reimbursement
Reasons for Subrogation - ANS Prevents insured from collecting twice (once
from insurer, once from responsible party).
• Holds the negligent party responsible for the
loss.
• Reduces insurance claims costs (and therefore,
rates)
Principal of utmost good faith - ANS A higher degree of honesty is imposed on both parties
to an insurance contract than is imposed on parties to other contracts
supported by three legal doctrines
-representations
-concealment
-warranty
Copyright ©2025 BRIGHTSTARS ALL RIGHTS RESERVED 4
