1.a house valued at 92000 was insured for 76000. The policy contained an 80 perc
ID: 2807630 • Letter: 1
Question
1.a house valued at 92000 was insured for 76000. The policy contained an 80 percent coinsurance clause. A flood caused damages of 78000.
A. How much insurance is needed?
B. How much will the company pay?
C. How Much will the owner pay?
2. Scott Abraham insured his house for 56000. The inurance policy has an 80% coinsurance clause. It also carries a 250 deductable clause, which means that the company will not pay for 250 of the loss. The house is valued at 85000. How much of a 5500 vandalism loss will the company pay?
3. Karen Balzen carries 89000 in tornado insurance on her house and garage. The policy has an 80% coinsurance clause and a 300 deductable clause. The present value of the house is 125000. How much of a 22,000 tornado loss will the company pay?
Explanation / Answer
1 (A) The coinsurance clause comes into effect only if the insured value is less than 80% of the replacement value of the home. In this case the insured value of $76000 is more than 80% of asset replacement value ( 0.8 x 92000 = 73600). Hence, the insurer will get reimbursement amounting to the entire $76000.
Under the 80% coninsurance clause, the minimum required insurance is 80% of the asset's replacement value of $92000 so as to ensure full reimbursement of insurance claims.
Therefore, Insurance Needed = 0.8 x 92000 = $73600
(B) The company will pay the full insured amount of $76000 as the coinsurance clause is not invoked.
(C) The remaining loss value from a total loss of $78000 will be paid by the owner.
Therefore, Remaining Loss Value = 78000 - 76000 = $2000
(2) Insurance Value = $ 56000 and Asset Value = $85000
Insurance % = 56000 / 85000 = 0.65 OR 65% which is below the coinsurance limit of 80%.
Hence, the coinsurance clause will be invoked.
Therefore, if total vandalism loss is $5500, then payout inclusive of deductibles = [56000 / (0.8 x 85000)] x 5500 = $ 4529.41
Actual Payables by the Company = Payout inclusive of deductibles - Deductibles = 4529.41 - 250 = $ 4279.41
NOTE: Raise Separate Question for Answer to the Third Question
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