Question

4. Eric and Susan just purchased their first home, which cost $130,000. They purchased a homeowner's policy to insure the home for $120,000 and personal property for S75000. They declined any coverage for additional living expenses. The deductible for the policy is $500. Soon after Eric and Susan moved into their new home, a strong windstorm caused damage to their roof. They reported the roof damage to be $17,000. While the roof was under repair, the couple had to live in a nearby hotel for three days. The hotel bill amounted to $320. Assuming the insurance company settles claims using the replacement value method, what amount will the insurance company pay for the damages to the roof? -bes0 00 P

Answer 1

There are two major types of Insurance (non-life) settlement claims:

1. Actual Value

2. Replacement cost

In Actual Value, the insurance company pays the "depreciated value" of the asset damanged. This may not be very helpful for the insurer as they may have to spend additional money to replace the asset completely.

Replacement cost insurance provides the insurer with a payment that is required to replace lost items. This provides the required amount for replacing the asset.

Because the roof damage was $17,000, which is lower than the total insurance coverage of $120,000, the insurance company will pay out $17,000 under the replacement value method.