Assume that fire destroys two rooms of furniture that were 6 years old and had an estimated useful life of 10 years. The replacement cost is $5,000. Therefore at the time of loss, the furniture was subject to an assumed physical depreciation of 60%, i.e., 3,000 in this case. Because the actual cash value is estimated at
$2,000. So, the maximum insurer would have to pay is:
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A. B. C. D.B
Based on the given information, the furniture that was damaged by fire had a useful life of 10 years, and it was 6 years old at the time of loss. This means that the furniture had already depreciated physically for 60% of its value, as calculated by multiplying its original cost by the percentage of its useful life that had elapsed (6/10 = 0.6, or 60%). Therefore, the depreciated value of the furniture at the time of loss was $3,000 ($5,000 x 0.6 = $3,000).
The actual cash value (ACV) of the furniture is determined as the depreciated value minus any applicable deductible. However, the question does not provide information about any deductible, so we assume that there is none. Therefore, the ACV of the furniture is $3,000.
The insurer would typically pay the lower of the ACV or the cost to replace the damaged property with similar property of like kind and quality. In this case, the cost to replace the furniture is $5,000, but the ACV is only $3,000. Therefore, the maximum the insurer would have to pay is the ACV of $3,000, which is answer choice C.
Answer choices A and B are both lower than the ACV and are therefore incorrect. Answer choice D represents the cost to replace the furniture, which is not relevant to the insurer's liability in this case.