Homeowners Insurance Exercise: Monica's Claims and Coverage, Assignments of Credit and Risk Management

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Homeowners Insurance Special Exercise 1) Monica has a house valued at $200,000 on a lot valued at $100,000 on the Florida coast. She buys a standard Homeowners 3 policy with a dwelling coverage policy limit (Coverage A) of $200,000, with no special endorsements. Monica’s house is struck by a hurricane with high winds, pelting rains and surging waves from the ocean. The roof and walls of the house suffer severe damage from the wind that will cost $75,000 to repair. Rain coming through a hole in the roof caused by the storm causes severe water damage to interior walls and contents. The damage to the interior structure from the rain will cost $20,000 to repair. In addition, the rain ruins Monica’s expensive furniture beyond repair. The replacement cost of the furniture is $60,000, and the furniture is 50% depreciated. A detached garage is also destroyed and will cost $30,000 to replace. Winds knock down several large trees on Monica’s property, which will cost $10,000 to replace. Finally, the surging waves from the ocean causes damages to the walls of her basement that will cost $8,000 to repair. What will the policy pay on structural damage (interior and exterior) to the house and garage? A) The policy will pay $75,000 on the dwelling and $10,000 for the garage. B) The policy will pay $103,000 on the dwelling and $30,000 for the garage. C) The policy will pay $95,000 on the dwelling and $30,000 for the garage. D) The policy will pay $95,000 on the dwelling and $20,000 for the garage. 2) Based on the information in Question 1, what will Monica’s policy pay on the damages to her furniture (ignore the effect of any deductibles)? A) The policy will pay nothing for the damaged furniture. B) The policy will pay $30,000 for the damaged furniture. C) The policy will pay $40,000 for the damaged furniture. D) The policy will pay $60,000 for the damaged furniture. 3) Based on the information in Question 1, what will Monica’s policy pay on the damage to her trees and basement? A) The policy will pay nothing for her trees and nothing for her basement. B) The policy will pay $10,000 for her trees and nothing for her basement. C) The policy will pay nothing for her trees and $8,000 for her basement. D) The policy will pay $10,000 for her trees and $8,000 for her basement.

The answer to Question 1 is C – the policy will pay $95,000 on the dwelling and $20,000 for the garage. The damage from wind and rain are both covered perils and the amount of damage is within the dwelling coverage limit. The garage is also covered for damage from wind but as a detached structure, the limit of coverage is only $20,000 (10% of the Dwelling Limit of $200,000) so the policy only pays $20,000 for the garage. The answer to Question 2 is B – the policy will $30,000 for the damage furniture. Monica can only get paid for the actual cash value of her furniture which is equal its replacement cost minus depreciation, i.e., $60,000 - $30,000 = $30,000. The answer to Question 3 is A – the policy will pay nothing for her trees and nothing for her basement. The trees are not covered for damages from any peril and the policy excludes flood as a covered peril – hence, there is no payment for damage to the basement caused by flooding.