What principle is applied when determining the payment amount for a claim under a household insurance policy?

The principle applied when determining the payment amount for a claim under a household insurance policy is the replacement cost. This principle represents the amount needed to replace or repair the damaged or lost property with new property of similar kind and quality, regardless of the property's depreciated value.

This approach is designed to ensure that the insured party can restore their property to its pre-loss condition and is often favored because it provides a more equitable outcome for policyholders. With replacement cost coverage, the insured does not suffer a financial loss due to depreciation, as they receive sufficient funds to replace the item without having to account for its used value.

In the context of household insurance, this principle encourages property owners to maintain their properties and can result in better recovery and satisfaction in the aftermath of a loss.