5. Jerry Carter's home is currently valued, on a replacement cost basis, at $392,000. When he...
5. Jerry Carter's home is currently valued, on a replacement cost basis, at $392,000.
When he last checked his policy, his home was insured for $301,954 and he did not have an inflation guard endorsement. If he has a $35,018 claim due to a kitchen fire, how much will his homeowner's insurance policy pay? How much would be paid if his home were totally destroyed? In order to obtain full replacement coverage, how much insurance should Jerry carry on his house?
If he has a $35,018 claim due to a kitchen fire, his homeowner's policy would pay $___________ (round to the nearest dollar)
Homework Answers
According to the 80/20 rule, Jerry should have insured atleast 80% of the value of the replacement cost of the house i.e. $392,000 * 80% = $313,600. Since he has insured only for $301,954, which is less that 80% and also there is no inflation guard endorsement, he'll be paid proportionately for the loss due to kitchen fire, which can be calcualted as follows:
$35,018 * 301,954/392,000 = $26,974.
So, Jerry will be paid only $26,974 on the claim due to kitchen fire.
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