Question

Frank purchased a $150,000 insurance policy for his home, which is valued at $125,000, with the hopes of making a $25,000 profit in the event his home is destroyed. After Frank burns his house down, he files a claim against his homeowners policy. Assuming that Frank's policy includes an overinsurance provision, how much will his insurer indemnify Frank for his loss?

A. $0
B. $125,000
C. $25,000
D. $150,000

Answer 1

Frank would typically be entitled to receive indemnification for the actual value of his home of $125,000. However, since he intentionally destroyed his house, this is considered insurance fraud, and he would be entitled to $0 due to the criminal nature of his actions.

Step-by-step explanation:

The insurer will indemnify Frank for the actual value of his loss, which is the value of his home. Since Frank's home is valued at $125,000, that is the maximum amount he would receive from the insurance claim, regardless of the policy amount being $150,000, if it were a legitimate claim.

However, because Frank's house was destroyed intentionally as indicated by the phrase "After Frank burns his house down," the insurance company would investigate and likely deny the claim. Intentional destruction of property to claim insurance benefits constitutes insurance fraud, which is a criminal offense.