Shelly and Chris have a homeowner's policy with $120,000 coverage,a $1,000 deductible,and required coverage of 80 percent of the replacement cost.Their home recently suffered extensive fire damage in the amount of $92,000.Assuming the replacement value of the home was $160,000,how much will the insurance company pay on this loss?
A)$73,600
B)$85,312
C)$86,250
D)$92,000

Question

Quizplus · Accepted Answer

To calculate the amount the insurance company will pay on this loss, we first need to determine if Shelly and Chris met the required coverage of 80% of the replacement cost.

80% of $160,000 (the replacement value of the home) is $128,000. Since their policy has $120,000 coverage, they did not meet the required coverage.

To determine how much the insurance company will pay, we use the following formula:

Amount of loss x (Coverage Held/Coverage Required) - Deductible

Plugging in the numbers, we get:

$92,000 x ($120,000/$128,000) - $1,000 = $85,312

Therefore, the insurance company will pay $85,312 on this loss.

Option B is the correct answer.

Shelly and Chris Have a Homeowner's Policy with $120,000 Coverage,a