Which method of loss valuation is contrary to the basic concept of indemnity?

Replacement cost is recognized as contrary to the basic concept of indemnity because it allows the insured to replace damaged or destroyed property without considering depreciation. The principle of indemnity aims to restore the insured to their pre-loss financial position but does not allow for profit or advantage from an insurance claim.

When a loss is valued at replacement cost, the insured receives compensation that could exceed the original purchase price or current market value of the property, thus potentially placing them in a better financial position than before the loss occurred. This approach can lead to overinsurance and is not aligned with the indemnity principle, which seeks to ensure that individuals do not profit from loss but are merely compensated for their actual losses.

In contrast, actual cash value, market value, and agreed value methods are all generally consistent with the indemnification principle, as they consider depreciation or specific agreements to determine the amount compensated, ensuring that the insured is not placed in a better financial position post-loss.