COMPUTING RECOVERY FOR LOSS UNDER HO CONTRACTS1

SECTION A (BUILDING) OR B (OTHER STRUCTURES)(revised 06.13.09)

RULES:

1. In general, if there is a covered loss and insurance coverage is equal to or greater than 80% of replacement cost2 of the building at the time of the loss, then 100% of the replacement cost of the loss is paid, limited by the face amount of insurance.

2. In general, if the amount of insurance equals less than 80% of the replacement cost of the building at the time of the loss then the larger of the following two amounts is paid (but maximum recovery is limited by the face of the policy):

a. Actual cash value of damaged part of buildingb. result of the following formula:

amount of insurance purchased ----------------------------------------------------- x replacement cost of the loss80% x replacement cost of building3

CASE 1: TOTAL LOSS, COINSURANCE REQUIREMENT MET

Replacement Cost of Building = $100,000Coinsurance Requirement = 80%Amount of Insurance = $ 95,000Loss (Replacement Cost) = $100,000RECOVERY (Limit = policy face) = $ 95,000

CASE 2: PARTIAL LOSS, COINSURANCE REQUIREMENT MET

Replacement Cost = $100,000Coinsurance Requirement = 80%Amount of Insurance = $ 95,000Loss (Replacement Cost) = $ 20,000RECOVERY (full recovery) = $ 20,000

1Except HO-82Replacement cost is equal to the amount it would cost to repair or replace with like kind and quality of material - not reproduction cost.3Anytime this formula is used, the amount may be reduced by certain types of property that normally are not destroyed when a loss occurs. Refer to the contract for specifics.

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CASE 3: TOTAL LOSS, COINSURANCE REQUIREMENT NOT MET

Replacement Cost = $100,000Coinsurance Requirement 80%Amount of Insurance = $ 60,000Loss (Replacement Cost) = $100,000

60,000 Recovery formula = ------------------ x 100,000 = $75,000

80,000

Assume the Property is 3/4 depreciated:Actual Cash Value = $100,000 (replacement cost) x .25 (percent undepreciated) = $25,000Higher of coinsurance or ACV is $75,000 but recovery is limited to the face value or $60,000.

CASE 4: PARTIAL LOSS, COINSURANCE REQUIREMENT NOT MET

Replacement cost of bldg. = $100,000Coinsurance Requirement = 80%Amount of Insurance = $ 60,000Loss (Replacement Cost) = $ 20,000

60,000 Recovery Formula = --------------- x 20,000 = $15,000

80,000

Assume Property is 3/4 depreciated:Actual Cash Value = $20,000 (Loss) x .25 (percent undepreciated) = $5,000Higher of Coinsurance or ACV is $15,000

CASE 5: DEDUCTIBLES - COINSURANCE REQUIREMENT MET

Subtract the deductible from the amount of insured's loss (RC)Example a.$100,000 RC bldg.; $80,000 Ins.; $40,000 RC Loss; $100 ded.Ans. $40,000 - $100 = $39,900Example b.$100,000 RC bldg.; $80,000 Ins.; $90,000 RC Loss; $100 ded.

Ans. $90,000 - $100 = $89,900 but Max. = $80,000

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CASE 6: DEDUCTIBLES - COINSURANCE NOT MET

- Subtract deductible from amount from insured's loss first and then apply coinsurance penalty.- Compare with (ACV - deductible)- Pick the larger of the two

EX: 100,000 RC bldg. 80% Coinsurance60,000 Insurance40,000 Loss (RC)500 deductibleBuilding is 1/3 depreciated

Ans. (1) 60,000 6 ------------- = ----- x (40,000 - 500) = 29,625

.8(100,000) 8

(2) ACV = 40,000 x 2/3 = 26,400 26,400 - $500 = $25,900 - Pay #1 above (Larger of the two)

PROBLEMTHE FINCH FAMILY

HOMEOWNERS CONTRACT

Assume the Finch family of Charlotte, North Carolina purchased their home in 1966 for $42,000. Since then, comparable homes in their neighborhood have most recently sold for $84,000. The cost to replace the home would be $75,000. It is estimated that the house is one-third depreciated. The Finchs have a $60,000 (face amount coverage A) Homeowners policy in force, similar to the policy shown in the Appendix. Answer the following questions as if each question were a separate event.

1) How much will the Finchs collect for a total covered fire loss under coverage A?

2) How much will be collected for a $20,000 partial loss under coverage A?

3) What would be your answers to questions 1 and 2 above if the Finchs had only $42,000 of insurance of Coverage A?

4) What would be your answers to questions 1, 2, and 3 above if there is a $1,000 deductible on Section I?

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POLICY QUESTIONSHO-2 and PAP

Mr. Tibbs owns the Homeowners (HO-2) and the Personal Auto Policy found in your text's appendices. The following limits apply.

HOMEOWNERS PERSONAL AUTO POLICY LIMITS: LIMITS:

A = $65,000B = $6,500 A = $100,000/$300,000/$50,000C = $32,500 B = $1,000D = $13,000 C = $100,000/$300,000E = $100,000 D = ACV $200 Ded. CollisionF = $500 $0 Ded. Other Than Collision

$100 flat deductible Section I One Vehicle listed on PolicyReplacement cost of the dwellingis $72,000. Replacement cost of theother structure is $10,000 If a loss occurs toreal or personal property 1/3 depreciationapplies, therefore, ACV = 2/3 replacement cost.

Your assignment is to determine if the following situations are covered by the above policies. If there is coverage how much should be paid? the above two policies are the only ones in existence. No other contracts are to be considered. Each event is a separate occurrence.

1. Mr. Tibbs rents out a room to two students. One of the students falls down the stairs. Hospital costs equal $4,500. In addition, all tuition was lost due to the inability to complete the semester. The student sued Mr. Tibbs for $5,500.

2. Mr. Tibbs wakes up one morning and discovers a large tree leaning on the house. Mr. Tibbs knew that the tree was dead and should have removed it two years ago. The cost to repair the dwelling is $3,000; to remove the tree $450; and the cost to plant a new tree $300.

3. The insured is found to be legally obligated to pay $170,000 because of bodily injury to a neighbor (a fishing partner) caused by an accident involving Mr. Tibbs' 35 horse-powered outboard motor boat.

4. In the above example, the boat was rented to Mr. Tibbs and the owner of the boat sues Mr. Tibbs for $3,000 in property damage because the boat sank due to Mr. Tibbs' negligence.

5. Mrs. Tibbs leaves a suitcase filled with clothing in a motel room. Twenty miles down the road, she remembers, and returns to collect it. Upon entry, she discovers that the suitcase is missing. Replacement cost of goods and suitcase is $2,300.

6. Mr. Tibbs' house is 55% destroyed by fire. Local building codes have changed since it was originally built and the codes state that the remaining portion of the structure must be torn down because the 45% is deemed unsafe. the mere change in building codes will increase the cost of replacement by 5%.

7. In the above example, when Mr. Tibbs inventories his damaged property, he discovers that a $6,000 (ACV) gun collection is missing. The adjusters conclude that in the confusion during the fire, someone stole the property.

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8. Mr. Tibbs fails to trim his bushes near the street. The bushes obstruct the view of traffic turning the corner. A motorist, when inching out to see around the bushes, is struck by a car. Both cars are "totaled" and each driver sues Mr. Tibbs for $135,000 in bodily injury and $5,000 in property damage.

9. Dr. Tibbs is a medical doctor who operates out of an office in his house. A patient comes to see Dr. Tibbs. While sitting in a chair in the waiting room, the chair breaks causing back injuries to the patient. The patient sues for medical expenses of $7,000, loss of wages of $16,000, and pain and suffering $20,000.

10. Mr. Tibbs takes his car to a repair shop. while the mechanic is test driving the car, he negligently rear ends a car stopped at a red light. The mechanic and Mr. Tibbs are both sued separately for $18,000 each.

11. A tornado causes an unattached garage to collapse on the owned car. The shed and the automobile are total losses. How much is covered under both contracts?

12. Mr. Tibbs has an argument with his wife and goes bar hopping. On the way home, he loses control of the car and injures three people. The police find that Mr. Tibbs is legally intoxicated. Each claim $150,000 in bodily injury. Their car is totaled. And, Mr. Tibbs' car requires $1,200 in repairs.

13. In the above example, Mrs. Tibbs is also in the car. she is injured and sues Mr. Tibbs for $350,000.

14. Mr. Tibbs decides to sell cars. One day, while he is demonstrating a new car, an accident occurs and the prospective buyer is injured. Mr. Tibbs and the auto company are each named in the suit claiming $150,000 of bodily injury.

15. Mr. Tibbs decides to move to Nevada so he rents a large (18 wheel) moving truck. During the trip, he flips the truck on an icy road. The rental company sues Mr. Tibbs for $175,000 of property damage liability.

16. In the above example, instead of moving his own property, Mr. Tibbs decides to move property of others for a business. The damage to the truck equals $175,000.

17. Mrs. Tibbs' fur coat (worth $700 ACV) is stolen out of the car after it is parked by an attendant at a restaurant.

18. Mr. Tibbs' car is at a repair shop. For transportation, he uses his son-in-laws' motorcycle. While using it, he runs down a pedestrian in a cross-walk. the pedestrian sues Mr. Tibbs for $7,600.

19. Mr. Tibbs buys a second car. Five days after the car is purchased, he collides into a telephone pole. damage to the car is $2,000. He had not told his agent about the car.

20. While driving his car under a bridge being spray painted by the Department of Transportation, the car is coated with paint. because of the chemicals being used in the paint, the auto's glass is permanently pitted. cost to repaint the car is $3,200 and the cost to replace the glass is $1,200.

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ANSWERSTHE FINCH FAMILY

HOMEOWNERS CONTRACT

1) No coinsurance penalty. Collects RC $60,000 if replaced2) No coinsurance penalty. Collects RC, $20,000 if replaced.3.1) Does not have at least 80% of RC on building. $42,000 payable; larger of $50,000 and $52,500 but

can’t pay more than face amount.3.2) ) Does not have at least 80% of RC on building. $14,000 payable; larger of $13,333 and $14,0004.1) $60,000; $75,000 - $1,000 = $74,000 but can’t pay more than the face amount.4.2) $19,000; $20,000 - $1,0004.3 a) Does not have at least 80% of RC on building $42,000, larger of $49,000 and $51,800. Can’t pay

more than policy limit4.3 b) Does not have at least 80% of RC on building $13,300; larger of $12,333 and $13,300

Applies to all answers: Can’t collect replacement cost unless actually repairs or replaces.

ANSWERSPOLICY QUESTIONS

1. BI Liability paid $5,500 - hospital costs and tuition; No exclusion applies2. House $3,000 - $100 deductible, tree $0, removal $0; No insured peril caused the tree to fall.3. $0 coverage excluded, size of boat and boat is owned and not declared.4. Care, custody and control exclusion $0; suing for property damage of rented boat.5. Theft covered; ACV = $2,300 – (1/3 x 2,300) - $100 = $1,4336. 55% x 72,000 = $39,600, $39,600 - $100 ded = 39,500; plus 10% of 65,000 available for ordinance or

building code changes. .05 x 72,000 = 3,600 for building code changes (6,500 available).7. $6,000 by fire - ded already taken; argue fire cause of loss not theft - doctrine of proximate cause, see

limits on certain property, section C.8. BI and PD max. $100,000 on HO; $500 med pay from HO to people in car (arising out of condition on

the premises).9. Business pursuits exclusion, no coverage.10. Mechanic $0 (In the automobile business), Tibbs up to 100/300/50 therefore $18,000.11. Shed: larger of $8,043 or $6,566; but can only get $6,500; Auto: ACV auto - $0 other than collision

ded.12. 100/300/50 available so 3 x $100,000 paid, up to $50,000 available for PD liability; Tibb’s car $1,200 -

$200 ded collision = $1,000.13. $0 because policy limits are already exhausted in #12; Also Med Pay pays up to $1,000.14. No coverage for use in the automobile business, not his own car.15. $0 - truck not a “non-owned” vehicle. Look at definition of “non-owned” in Section D, problem with

type of vehicle.16. $0 same as #15 and excludes moving people or property for a fee (public or livery conveyance).17. $700 ACV - $100 deductible paid. Property covered for theft anywhere in the world.18. $0 no coverage for using any vehicle with less than 4 wheels.19. $2,000 - $200 deductible auto; see definition page “your covered auto.”20. Other than collision loss (3,200 + 1,200) $4,400 - $0 deductible.

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