Los Angeles Claims Adjuster Property and Causality Practice Exam

Which law requires insurance companies to pay the full agreed value of the policy in a total loss event?

1. Residual market law

2. Valued policy law

3. Insurance fairness law

4. Replacement cost law

The correct answer is: Valued policy law

The Valued Policy Law requires insurance companies to pay the full agreed value of the policy in the event of a total loss. This law is designed to protect policyholders by ensuring that they receive the full amount of their coverage without depreciation deductions or disputes over the actual cash value of the damaged property. In a total loss situation, when a property is destroyed or irreparably damaged, the Valued Policy Law stipulates that the insurance company must honor the agreed policy value, allowing the insured to receive compensation that reflects the true value of their loss as predetermined in the policy. This law is particularly important for certain types of policies, such as those covering unique or valuable properties like antiques, art, or even in certain situations, residential properties, where the market value could substantially differ from the replacement cost. It helps provide certainty and peace of mind to policyholders, knowing that they will not suffer additional financial loss due to disputes over value. The other options mentioned do not serve the same function. The residual market law pertains to the insurance market structure for high-risk individuals, the insurance fairness law does not specifically address total loss payments, and the replacement cost law focuses on compensating for how much it would cost to replace the insured item rather than guaranteeing the agreed