Question

A fire severely damages one store. The cost of repairing the damage is $127,000. ABC's basis in the store building is $320,000. ABC's insurance company reimburses ABC $100,000 for the fire damage.

Answer 1

A fire-damaged store with repairs costing $127,000 and a basis of $320,000 receives $100,000 from insurance to help cover the costs, exemplifying how insurance helps mitigate financial loss.

Step-by-step explanation:

A store owned by ABC has suffered from fire damage, with a repair cost totalling $127,000. The store's basis, which is the value used for tax purposes, stands at $320,000. Luckily, ABC's insurance company is providing a reimbursement of $100,000 towards the fire damage.

This scenario presents a common occurrence in the realm of insurance where damage costs can vary significantly. For comparison, in automobile insurance, we might see accidents ranging from minor door dings costing $100 up to large accidents costing $15,000 in damages. Insurance serves as a financial safety net, ensuring that unexpected damages, such as those caused by fire or car accidents, do not become catastrophic financial burdens for the insured parties. By spreading the risk among many policyholders, insurance companies can collect premiums to cover the total damages incurred by their insured clients. Consider an example where each of 100 drivers pays a $1,860 premium to cover a total of $186,000 in damages in a year.