Jerry Carter\'s home is currently valued, on a replacement cost basis, at $494,0

Question

Jerry Carter's home is currently valued, on a replacement cost basis, at $494,000. When he last checked his policy, his home was insured for $359,227 and he did not have an inflation guard endorsement. If he has a $31,702 claim due to a kitchen fire, how much will his homeowner's insurance policy pay? How much would be paid if his home were totally destroyed? In order to obtain full replacement coverage, how much insurance should Jerry carry on his house?

Question - If he has a $31,702 claim due to a kitchen fire, his homeowner's policy would pay ?$ (Round to the nearest dollar.)

Explanation / Answer

There's an 80% rule for home insurance according to which insurance companies do not pay full replacement coverage if the homeowner has not bought coverage for atleast 80% of the replacement value of the house.

Replacement cost of house = $494000

80% of replacement cost of house = 80% of $494000 = $395200

Homeowner has to get a coverage of atleast $395200 to get full replacement coverage.

For a claim of $31702, Payout = (Insured Value/ 80% of replacement cost of house) * Value of claim

= $359227/$395200 * 31702

=$28816.

Since he has insured his house for just $359227, he can only send claim for that amount. Since he doesn't have over 80% coverage, even if the whole house was destroyed he would not be paid the full coverage.

Payout if the entire house is destroyed = (Insured Value/ 80% of replacement cost of house) * Value of claim

= $359227/$395200 * $359227 = $326528

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