Jamil and Vicky 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: How much will the insurance company pay for the $50,000 loss to their home?

Question

Jamil and Vicky 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:  How much will the insurance company pay for the $50,000 loss to their home?

Quizplus · Accepted Answer

Since Jamil and Vicky have replacement coverage, the insurance company will pay for the cost of repairing or replacing the damages with no deduction for depreciation. The policy has a $1,000 deductible, so the insurance company will pay $50,700 ($50,000 in damages - $1,000 deductible). Option A is incorrect because the deductible must be subtracted from the total amount paid by the insurance company. Option B is incorrect because it does not account for the full amount of damages. Option D is incorrect because $200,000 is the original policy amount and does not reflect the current replacement value of the home.

Jamil and Vicky Purchased a $200,000 Homeowners Policy for Their