unit 6

unit 6

by Kathleen I French -
Number of replies: 18

Introduction and Unit Six - Lesson 1  (20 pages)

What am I missing? How did they get that answer?

Your answer : 107,000
The correct answer:

$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?

In reply to Kathleen I French

Re: unit 6

by Grisel Padron -

So essentially the deductible is a non-issue right? It was a total loss and since the building is insured for $100,000, then that is what is payable plus the debris removal.  The deductible is taken from the loss/value of the building and in this case, the loss is $125,000 because that is the VALUE of the building. If the insured had covered the building at full value, I think the payment would have been $125,000-$5,000=$120,000+$7,000=$127,000. Is this correct?

In reply to Grisel Padron

Re: unit 6

by Jan Bradburn- -

Since the property is not insured to 80% of value, this is a coinsurance question.  You do not consider the deductible in coinsurance questions.  You simply work the formula.

Grisel - your statement is almost correct.  You subtract the deductible from the loss.  In this case it happens to be the value of the property, but you want to focus on subtracting the deductible from the loss (not the property value).  Depending on the question, this could be confusing if you use the incorrect terminology.

Jan

In reply to Jan Bradburn-

Re: unit 6

by Grisel Padron -
But $100,000 IS 80% of the value. Then you say that you do not consider deductible in a coinsurance question. Still confused about this after all these months. When is the deductible considered? If its a total loss, and the value is $125,000 then that's also the loss. Coverage was at $100,000 which is 80% so we should not consider coinsurance and just understand that they can only recover the total loss up to their coverage limit of $100,000 plus the debris removal $7,000?
In reply to Grisel Padron

Re: unit 6

by Grisel Padron -

I just realized I asked this question before so I looked at your reply and understood it better. Because they insured the property at 80%, then the coinsurance does not apply. The $5K is taken from the $125K which leaves $120K but payment can't be more than coverage which is $100K so he gets the $100K plus the $7K debris removal. What would happen if coverage was at $90K which is less than 80%? Would we use the coinsurance formula? WHEN does the deductible get deducted? Say Value is still $125K but coverage is at $135K with total loss. How would that work? Take $5K deductible from the loss of $125K and payable would be $120K plus $7K debris removal even though coverage is higher??

In reply to Grisel Padron

Re: unit 6

by Jan Bradburn- -

Grisel,

If the property is not insured to at least 80% of the value, you have to apply the coinsurance formula and a deductible does not apply.  If the property is insured to value, you apply the deductible, but the policy will never pay more than the policy limit.

Most insured do not insure their property "over" the value ($125,000 vs. $135,000).  That would result in higher premium dollars???

Jan

In reply to Jan Bradburn-

Re: unit 6

by Grisel Padron -
Ok so if value is $125000, insured at $100,000 which is 80%, then you apply the deductible. In this particular case the deductible would be taken from $125,000 and payable would have been $125,000, right? But he only had $100,000 coverage so applying the deductible to any amount higher than the limit would not be valid since that's the maximum payable plus the debris removal. So my question remains, WHEN would the deductible have an impact at all? If it was only a partial loss at $110,000 with a value of $125,000 and same coverage, the deductible would still apply and they would still only get $100,000. Would it have an impact if the loss were less than the coverage? If the loss was $90,000 under the same scenario, would it be $90,000-$5,000=$85,000+$7,000 so payable would be $92,000?
In reply to Grisel Padron

Re: unit 6

by Jan Bradburn- -

Grisel,

You apply the deductible against the loss any time property is insured to at least 80% of the value.

The best practice you can have at point is to take the state exam.  This will give you the "best" idea of what you need to study.  You are overstudying and overthinking each question.  If you take the state exam now, the worst-case scenerio is you will fail and you can retake the exam.  At least you will can get a feel for the test and you will find out the areas where you need to focus furthr study.

Jan

In reply to Jan Bradburn-

Re: unit 6

by Deleted user -

Jan, I wouldn't say she is overthinking it. I am confused as well.We are all trying to understand it, That type of question is on a state exam.

Can you please tell us how the math works excactly.

125,000 - value of the property

100,000 - is 80 % of the value and they insured for 100, 000.

Ded is 5 K.

How do we get to 107,000?

Thank you

In reply to Deleted user

Re: unit 6

by Grisel Padron -

Hi Monique,

Although I didn't get a reply as to whether my calculation is correct, I believe my understanding is accurate. The deductible is only applicable when the property is insured at 80% or higher. It appears that the only time it would have an impact is if the LOSS is less than the coverage limit, just like my example below: 

Loss $90,000-Deductible $5,000=$85,000+$7,000 Debris removal=$92,000 payable

The question however, shows a TOTAL loss. In this case that is $125K. You subtract the $5K from that comes to $120K BUT the coverage limit is only $100K so really the deductible has no impact. For me it's easier to determine first if it's covered at 80% or more. If yes, you apply deductible and subtract from the loss, BUT  if the remainder ($120K) is higher than the coverage limit, the ignore the deductible. In this case it was $100K that's payable + $7K of debris removal.

If not insured at 80% or more, THEN you use the coinsurance formula which is the loss x coverage amount divided by the value x coinsurance percentage.

In this problem, if the coverage limit were $70K which is less than the 80% then you ignore the deductible and use the formula above like this:

Loss $125,000 x Limit $70,000 divided by Value $125,000 x 80% = $87,500.

By meeting the coinsurance requirement, they get the full $100K limit + $7K debris removal. By NOT doing so, they get $87,500 + $7K debris removal.

I hope I'm right and if so, I hope that clarifies this a little.

 

In reply to Grisel Padron

Re: unit 6

by Deleted user -

I'm pretty sure your calculatiosn are correct. I wouldn;t worry about oversudying. You can"t study enough for that test and to me going to the exam as an option to see what to study is unacceptable. First, the exam is expensive. Second, every time you take its; set up to give you more difficult questions. And the stress and hassle of studying again !!

I read that manual millions of times and questioned everything and I paased with a high score, But I was like you. I asked and asked and read till I totally understood it

In reply to Deleted user

Re: unit 6

by Grisel Padron -

Lol. You're funny. I appear to over study but it's because I've always had huge challenges with assimilating material and it's even more difficult if I don't understand so that's a critical part and must be done first in my world, so then I can work on storing it long enough 'til test time AND not get the details all jumbled up in my head. It takes me reading material three times before I can start to understand it. Maybe I have ADD but I'm battling the demons............good luck!

In reply to Deleted user

Re: unit 6

by Jan Bradburn- -

Taking the state exam costs less than practic courses, study guides and flash cards.  And you get the added bonus of "real" practice.  Also, there is a good chance you will pass and then you won't have to study anymore!

Jan

In reply to Jan Bradburn-

Re: unit 6

by Grisel Padron -

Hi jan,

LOL. Yes, I can't wait to not have to study. I'realized after all is said and done, that reviewing the OLT material and questions after each section, have been excellent! I'm fortifying my strong areas and getting a better understanding of my weaker areas. I'm so glad I still have access and will share that in the forum.

What I meant by the coinsurance problem is that after determining if the coverage is 80% or more, then the only time the deductible would have an impact is if the loss less the deductible, is lower than the coverage limit. Otherwise, the insured receives the coverage limit. That is my understanding but just got complicated.

Thank you for clarifying and confirming.

I put out a couple of other questions last night that are basic calculations and if the OLT system would provide an explanation for the calculation, it would help students a lot. Otherwise, we have to find the information in the manual and that's time-consuming because of all the details to sift through.

In reply to Grisel Padron

Re: unit 6

by Jan Bradburn- -

Grisel,

You are mostly correct.  It is incorrect to assume you ignore the deductible - you never ignore the deductible.  It always has to be included in the process.  There are two steps in problems involving property that are insured to a minimum of 80% of value:

1. Subtract the deductible from the loss

2. Check the policy limit to make sure there is enough coverage

In this problem the deductible does not figure in the amount, but you have to include this step in the calculation.

Jan

In reply to Deleted user

Re: unit 6

by Jan Bradburn- -

The property is insured to 80% of the value so this is not a coinsurance problem.  The value of the property is $125,000 so the insured lost $125,000.  You subtract the deductible from the loss.  $125,000 - $5000 = $120,000, but the insured only has $100,000 policy limit so they will only receive $100,000.  Since debris removal is additional coverage, they will also receive $7000 for debris removal.

$100,000 + $7000 = $107,000

Jan

In reply to Jan Bradburn-

Re: unit 6

by Grisel Padron -

LOL. You're probably right and I might be overstudying. That's because I do NOT want to retake the exam. I want to take it once and be done so I'm trying to cover as many bases as I can and not make stupid mistakes. Thank you!

In reply to Grisel Padron

Re: unit 6

by Kathleen I French -

Jan, Im still not getting it. Can you do the problem again

In reply to Kathleen I French

Re: unit 6

by Jan Bradburn- -

These are the basic guidelines you need to work these problems:

1. Check to see if the property is insured to 80% of the value

2.If property is insured to 80% or more - apply deductible to the loss and check against the poplicy limit

3. If properyis  not insured to at least 80% of the value - apply the coinsurance formula (there is no deductible)

Use these guidelines and please let me know if you need further explanation.

Jan