David has a Homeowners 3 policy that provides $280,000 of insurance on his dwelling,which has a current replacement value of $400,000.Ignoring any deductible,how much will David collect if a roof with a replacement value of $16,000 but an actual cash value of $10,000 is destroyed in a fire?
A)$10,000
B)$12,000
C)$14,000
D)$16,000

Question

Quizplus · Accepted Answer

David's policy provides coverage up to $280,000 on his dwelling, which is less than the current replacement value of $400,000. This means that his policy covers 70% of the replacement cost. The same percentage applies to the actual cash value of the roof, which is $10,000, so David will collect 70% of the actual cash value, which is $7,000. However, most policies have a provision that states that if the cost to repair or replace is more than a certain percentage of the total coverage on the dwelling, the policy will pay up to that amount. This percentage is usually 80%, so in this case, the policy will pay up to $224,000 ($280,000 x 80%). Since the cost to replace the roof is only $16,000, which is less than 80% of the coverage on the dwelling, David will collect the full amount of the actual cash value, which is $10,000. Adding this amount to the cost to replace the roof, David will collect a total of $24,000. However, since he only needs to replace the roof, he will only collect $14,000 ($10,000 for actual cash value and $4,000 to replace the roof). Therefore, the best answer is C.

David Has a Homeowners 3 Policy That Provides $280,000 of Insurance