Question

Assume that five years ago a couple insured their home for [its then appraised value of] $60,000. Two weeks ago they had a stove fire resulting in an estimated loss of $15,000 for repairs. The adjuster finds that the value of their home is now $100,000, but the home is still only insured for $60,000 and has a deductible of $500. The policy has an 80% coinsurance clause. How much should the adjuster pay to the couple?

(A) $11,500
(B) $10,875
(C) $14,500
(D) $15,000

Answer 1

The adjuster should pay $11,100 to the couple.

Step-by-step explanation:

To calculate the amount the adjuster should pay to the couple, we need to consider the coinsurance clause and the deductible. The coinsurance clause states that the insurance coverage should be at least 80% of the value of the home. In this case, the insured value is $60,000, which is only 60% of the current home value of $100,000. Since the insured value is less than 80%, the couple is considered underinsured.

To calculate the payment, we first need to calculate the value of the loss that the couple is responsible for. This is calculated by subtracting the deductible of $500 from the estimated loss of $15,000, resulting in $14,500. Next, we calculate the reimbursement amount by multiplying the loss value by the coinsurance percentage (80%): $14,500 x 0.8 = $11,600. Finally, we subtract the deductible from the reimbursement amount to get the final payment: $11,600 - $500 = $11,100.