As the risk analyst for an electronics retailer, you have been asked to evaluate two commercial property insurance policies. The only difference between the two policies is the valuation provision: Policy A has an Actual Cash Value (ACV) loss settlement provision; and, policy B has a Replacement Cost New (RCN) valuation provision. The premium for the ACV policy is $750,000 annually while the premium for the RCN policy is $800,000 annually. Each policy has a straight deductible of $500,000. Co-insurance does not apply. Evaluate the following loss scenario according to the information below:

Your company has a warehouse in Savannah, Georgia. Assume this warehouse sustains $1,000,000 in direct damage from a fire. The amount of depreciation on the building is $250,000.

a. How much will policy A pay on the claim?

b. How much will policy B pay on the claim?

c. Which policy do you recommend and why?