Question

In: Finance

Case 3: Larry’s house is valued at $500,000. He has a $200,000 homeowners’ insurance policy which...

Case 3: Larry’s house is valued at $500,000. He has a $200,000 homeowners’ insurance policy which has a 90% coinsurance. His house is damaged during a windstorm. His loss is $300,000 on a replacement cost basis and $150,000 on an ACV basis.

  1. Should Larry file insurance claim on replacement cost basis or ACV basis? Calculate both values.

Solutions

Expert Solution

Given information,

value of House = $500000

Homeowner's insurance policy = $200000

coinsurance = 90%

loss of damage by Replacement cost basis = $300000

loss of damage by ACV basis = $150000

  • value of claim on replacement cost basis = 200000/90% of 500000 * 300000 = $133333.33
  • value of Claim on ACV basis = 200000/90% of 500000 * 150000 = $66666.67

conclusion,

Larry should file an insurance claim for the option of Replacement Basis as, it particularly subtracts deductible amount whereas, in ACV basis method, it considered depreciation deduction too.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Finn and Rachel purchased a $200,000 homeowners policy for their house in 1988. They have renewed...
Finn and Rachel purchased a $200,000 homeowners policy for their house in 1988. They have renewed the policy each year since and have replacement coverage. This policy has a $1,000 deductible. Their home now has a replacement value of $275,000. Last week they came home to find a small fire which caused the following damages: Home$50,000 personal property$20,000 Landscaping$ 7,000 Assume Finn and Rachel have a standard HO-3 policy with personal property covered at 50% and landscaping covered for 10%....
You own a house that is valued at $500,000. The probability of a house fire in...
You own a house that is valued at $500,000. The probability of a house fire in your area is 0.0002, and if a house fire happens, your home’s value will be reduced to $0. You are considering buying an insurance for your house. In case of fire, the insurance company will pay you $300,000. Ignore depreciation, taxes, etc. of your house in the following calculations. What is the expected values of your home without insurance and your home if the...
Mark has a Homeowners 3 (special form) policy that provides $120,000 of insurance on his dwelling...
Mark has a Homeowners 3 (special form) policy that provides $120,000 of insurance on his dwelling and $100,000 on personal property. The replacement cost of the home is $200,000. Assume the coinsurance requirement is 80% and ignore any deductible. Treat each case separately 4. How much will Mark collect if his sofa, with a replacement value of $2,500 but an actual cash value of $1,800, is destroyed in a fire.
Mark has a Homeowners 3 (special form) policy that provides $120,000 of insurance on his dwelling...
Mark has a Homeowners 3 (special form) policy that provides $120,000 of insurance on his dwelling and $100,000 on personal property. The replacement cost of the home is $200,000. Assume the coinsurance requirement is 80% and ignore any deductible. Treat each case separately. 1. If the dwelling is damaged by a covered peril, would the insurer pay replacement cost for the damage? (circle one) Yes No Explain why or why not:
Mark has a Homeowners 3 (special form) policy that provides $120,000 of insurance on his dwelling...
Mark has a Homeowners 3 (special form) policy that provides $120,000 of insurance on his dwelling and $100,000 on personal property. The replacement cost of the home is $200,000. Assume the coinsurance requirement is 80% and ignore any deductible. Treat each case separately 7. Mark’s house is by Mississippi river and his house is badly damaged by flood. As a result of the flood, the front lawn has a 3-foot crack and is now uneven. (1 point) Would it be...
Mark has a Homeowners 3 (special form) policy that provides $120,000 of insurance on his dwelling...
Mark has a Homeowners 3 (special form) policy that provides $120,000 of insurance on his dwelling and $100,000 on personal property. The replacement cost of the home is $200,000. Assume the coinsurance requirement is 80% and ignore any deductible. Treat each case separately 6. Mark accidentally spills a can of paint while painting the living room. A wall-to-wall wood floor of the room (which is considered part of the dwelling) is badly damaged and must be replaced. Would the wood...
You own a house that is valued at $500,000. The probability of ahouse fire in...
You own a house that is valued at $500,000. The probability of a house fire in your area is 0.0002, and if a house fire happens, your home’s value will be reduced to $0. You are considering buying an insurance for your house. In case of fire, the insurance company will pay you $300,000. Ignore depreciation, taxes, etc. of your house in the following calculations. Suppose you are a risk-neutral person, what would be the most you are willing to...
Alice has a life insurance policy with a cash surrender value of $200,000 on which she...
Alice has a life insurance policy with a cash surrender value of $200,000 on which she has paid $30,000 in premiums. She has decided to cash in the policy. Discuss the tax consequences if Alice is terminally ill and decides to use the proceeds to take a cruise around the world. a) She can exclude all of the gain in the policy ($200,000 less $30,000 of premiums paid) from gross income b) She must include all of the gain ($170,000)...
1. Alice has a life insurance policy with a cash surrender value of $200,000 on which...
1. Alice has a life insurance policy with a cash surrender value of $200,000 on which she has paid $30,000 in premiums. She has decided to cash in the policy. Discuss the tax consequences if Alice is terminally ill and decides to use the proceeds to take a cruise around the world. a. She must include all $200,000 received in gross income b. She must include $30,000 in gross income c. She must include all of the gain ($170,000) in...
The Johnsons own a homeowners’ insurance policy already. Which of the following risks will require them...
The Johnsons own a homeowners’ insurance policy already. Which of the following risks will require them to purchase separate insurance coverage? A : A lawsuit from a neighbor injured at a house party. B : A kitchen fire. C : The home is in a flood plain. D : Theft from a break-in.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT