Joan insures her house (with a market value of $50,000,not including $10,000 for the foundation and lot)with a $30,000 insurance policy calling for 80% co-insurance.A fire causes $10,000 worth of structural damage valued at replacement cost.Considering only the information provided,what amount is she likely to collect from the insurance company?

Question

Quizplus · Accepted Answer

The co-insurance requirement means that her policy will only cover 80% of the replacement cost of the home (not including the foundation and lot). The replacement value of the home is $50,000 (market value) + $10,000 (for the foundation and lot) + $10,000 (structural damage) = $70,000. 
80% of the replacement value is $56,000, which is more than her $30,000 insurance policy. Therefore, she is underinsured and will only receive a percentage of the claim based on her co-insurance percentage. 
To calculate this, we divide the amount of insurance she has ($30,000) by the amount of insurance she should have had based on the co-insurance requirement ($56,000): 
$30,000 ÷ $56,000 = 0.5357 (rounded to four decimal places) 
This means that she will receive 53.57% of the claim amount, which is: 
$10,000 (structural damage) x 0.5357 = $5,357 
However, there is often a deductible on insurance policies, which is the amount that the policyholder must pay out of pocket before the insurance company will cover the rest of the claim. Assuming there is a $500 deductible: 
$5,357 - $500 = $4,857 
Therefore, Joan is likely to collect $4,857 from the insurance company.

Joan Insures Her House (With a Market Value of $50,000,not