Question

A dwelling with a replacement cost of $150,000 was insured under a Homeowners 3 policy for $100,000 at the time the roof was destroyed by a windstorm. The actual cash value of the loss was $9,000, but it will cost $12,000 to replace the roof. Ignoring any deductible, what will the insurer pay to settle this loss?

Answer 1

The insurer will pay $9,000 to settle the loss, as it is the lower amount compared to the $12,000 cost to replace the roof.

Step-by-step explanation:

To calculate the amount the insurer will pay to settle this loss, we need to consider the replacement cost, actual cash value, and the cost to replace the roof. In this case, the replacement cost of the dwelling is $150,000, but it was insured for $100,000. The actual cash value of the loss is $9,000, while the cost to replace the roof is $12,000. Ignoring any deductible, the insurer will pay the lesser of the two amounts: the actual cash value or the cost to replace the roof.

In this scenario, the insurer will pay $9,000 to settle the loss, as it is the lower amount compared to the $12,000 cost to replace the roof.

Answer 2

The correct answer is $10,000.

Step-by-step explanation:

According to the scenario, the given data are as follows:

Replacement cost = $150,000

Insurance value = $100,000

Replacement value = $12,000

According to the policy, 80% replacement cost can be considered.

So, we can calculate the amount that insurer pay by using following formula:

Amount insurer pay = Replacement value × Insurance value ÷ 80% of replacement value

= $12,000 × $100,000 ÷ $120,000

= $10,000.