Your answer : $102,000
$107,000. The deductible applies to the loss ($125,000),not to the amount of insurance.
The Question:
The insured's covered building, with a value of $125,000, insured for $100,000, was a total loss from a covered cause of loss. Cost of removing debris after loss was $7,000. The policy deductible is $5,000. With no other coverage issues, how much is payable to the insured?
Could someone please explain to me how I got this one wrong. Thisis how I came up with my answer:
1st- I made sure the insured was insured at 80% co-insurance- He was so no pentalty
2nd- I took the $100,000(he was insured for) and subtracted the deductible of $5,000= $95,000
3rd- I added $7,000 debris removal to the $95,000= $102,000 but it says it was wrong.
Any help would be greatly appreciated,
Tami
Tami,
This is a tough question and it is often confusing to students. A deductible is always applied to the loss and not the policy limit. Although you also have to remember that the insurance company will never pay you more than the policy limit.
In this case the insured lost $125,000 so the deducitble is subtracted from $125,000. This means the insured should receive $125,000 - $5,000, but they only have $100,000 in coverage available so the insurance company will pay them $100,000 instead of the $120,000 they would have received if they were properly insured.
You correctly added the debris removal cost of $7000 which makes the correct answer $107,000.
I hope this helps. Please let me know if you have other questions.
Jan