I would like additional information on how to compute loss settlement amounts for the PAP. I have read and studied the material provided, but I do not feel confident. i see the answers, but I am having trouble find the logical explanation for the computations. What do you suggest.
Hi.
I'm in the same boat on this one. Could you please forward the msg you sent Sara to me as well? Thanks!
Hi Sara,
I'm not sure I understand your question. Would you please give me an example?
Jan
I have the same question, but about loss settlements on homeowner and dwelling policies in Chapter 4
The several examples in the course suggest that if Coverage A is less than 80% of the Reconstruction Cost at the time of loss, then the carrier will pay 80% of the loss (or ACV, whichever is greater). I used this formula on every example and was scored as correct. But I don't think that is the same formula as given in the textbook.
Unit 4 Lesson 2 4.2 Section 1 asks
"An insured has an HO-3, no endorsements, with following limits: A - $70,000, B - $7,000, C - 35,000,D- $14,000. The policy has a $500 deductible ($500 deductible for windstorm/hurricane).
What is the amount payable (if any) when:" A windstorm caused extensive damage to the roof of the insured's residence, requiring replacement of a portion. Cost to replace was $5,000. Taking depreciation into account, the actual cash value was $3,000. At the time of the loss, the replacement value of the dwelling was $125,000"?
The answer of 3,500 loss payment agrees with the formula - that 80% of the loss minus the deductible equals the loss payment, or 0.8 x 5,000 = 4,000 – 500 = 3,500. That is 80% of the loss less the deductible.
The textbook says two things about loss settlements on page 60:
1. that the carrier will pay full replacement cost if Coverage A is at least 80% of the replacement value at the time of loss.
2. if the (Coverage A ) limit is less than 80% the carrier will pay the proportion of full replacement cost that the limit bears to 80% of the replacement value, but not less than actual cash value.
Using the course example, the home would have to be insured for 80% of the 125,000 replacement value for full replacement cost to be paid up to the 70,000 limit of the policy.
1. Multiplying 0.8 times the 125,000 replacement value shows that 80% of the RCV was 100,000. The home was only insured for 70,000. The carrier will not pay RCV.
2. What the carrier will pay is the proportion ( meaning percentage ) that Coverage A is of the Replacement Cost. What percentage is 70,000 of 100,000? Find the percentage by dividing 70,000 by 100,000. The carrier will pay 70% of the loss (less the deductible ) or Actual Cash Value, whichever is greater. In this case 0.7 x 5,000 = 3,500 - 500 = 3,000. The actual cash value was also 3,000. The carrier should pay 3,000.
Using another example. If the home was only worth 115,000 at the time of the loss and had a 5,000 loss worth 3,000 ACV
Find the 80% of RCV by multiplying 0.8 x 115,000 = 92,000. Then find what percentage Coverage A is of the required 80% by dividing 70,000 by 92,000 to get 0.76 Which means 76%
The carrier will pay 76% of the 5,000 loss, less the deductible, or 0.76 x 5.000 = 3,800 - 500 = 3,300.
The coinsurance clause formula appears to be:
Loss payment equals Coverage A divided by 80% of Replacement Cost.
Which is correct,
And when is the comparison to ACV is made, before or after the deductible is taken out. I'm guessing before the deductible as the deducible would come out of either RCV or ACV.
Steve,
Although it sometimes works out, it is oversimplifying to assume that if a property is insured for 50% of its' value, losses will be paid at 50%. That is the idea behind coinsurance, but you have to use the coinsurance formula to get the correct answer every time.
Also, when using the coinsurance formula, you do not subtract the deductible. The deductible is assumed in the formula.
If a property is not insured to at least 80% of it's value, you use the formula on page 29 in the state manual to determine the amount payable in a loss.
Jan