Question

Last year, Brett and Amber Walsh bought a home with a dwelling replacement value of $160,000 and insured it (via an HO-5 policy) for $141,000. The policy reimburses for actual cash value and has a $250 deductible, standard limits for coverage C items, and no scheduled property. Recently, burglars broke into the house and stole a 3-year-old television set with a current replacement value of $1,400 and an estimated useful life of 10 years. They also took jewelry valued at $1,200 and silver flatware valued at $3,200.

1. If the Walsh's policy has an 80% co-insurance clause, do they have enough insurance?
   Yes
   
2. Assuming a 50% coverage C limit, calculate how much the Walshes would receive if they filed a claim for the stolen items. Do not round intermediate calculations. Round the answer to two decimal places.
   $  
3. What advice would you give the Walshes about their homeowner's coverage?
   

Answer 1

Part (a)

Answer is YES

Dwelling replacement value = 160,000

80% coinsurance clause translates into an amount of = 160,000 x 80% = 128,000

Sum insured = $ 141,000 > $ 128,000 = 80% coinsurance clause. Hence, they have enough insurance.

Part (b)

3-year-old television set with a current replacement value of $1,400 and an estimated useful life of 10 years.

Cash value of old television = Replacement value proportionate to the balance life = Current replacement value - 3 / 10 x Current replacement value = 1,400 - 1,400 x 3 / 10 = 980

In case of jewelry, the limit set is $ 1,000.

Cash value of jewelry for claim purpose = min (value lost, 1000) = min (1200, 1000) = $ 1,000

In case of silver flatware, the limt set is $ 2,500.

Cash value of silver flatware for claim purpose = Min (3200, 2500) = $ 2,500

The amount Walshes will receive = Total cash value of the lost item - deductible = 980 + 1000 + 2,500 - 250 = $ 4,230

Part (c)

Walshes is able to claim an amount of $ 4,230 against a total loss of $ 1,400 + 1,200 + 3,200 = 5,800. Thus recovery %age is = 4,230 / 5,800 = 73%.

This shortfall can be bridged by either of the two ways:

1. Take the personal property floater (PPF) as an endorsement to homeowner’s policy - this may lead to a blanket coverage of the items or scheduled coverage of the items not covered in a typically standard homeowner's policy. The cost may be exorbitantly high.
2. By taking out a separate floater policy.