Question

Jerry Carter's home is currently valued, on a replacement cost basis, at $324,000. When he last checked his policy, his home was insured for $228,586 and he did not have an inflation guard endorsement. If he has a $21,438 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 $21,438 claim due to a kitchen fire, his homeowner's policy would pay $ (Round to the nearest dollar.)

Answer 1

Solution :-

Minimum Amount of House Insurance coverage required ( as per 80% rule as recommended by most insurance companies )

Replacement Cost of House x 0.8

$324, 000 x 0.80

$259,200

Therefore Minimum amount of Insurance to be bought = $259,200

Since the amount of Insurance actually bought ( $228,586 ) is less than the minimum required amount, reimbursement shall be on a proportionate basis

Amount of Reimbursement = Value of Loss * ( Value of Insurance Bought / Minimum Amount )

= $21,438 * ( $228,586 / $259,200 )

= $18,905

Therefore $18,905 will be reimbursed by the insurance company.

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