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13.6 Review and Practice
- Why might auto policies exclude compact disks and players?
- Identify the major factors that determine the cost of a homeowners policy.
Bill has a homeowners policy with form HO-3. His home has a replacement value of $80,000, and the contents are worth $45,000 at replacement cost or $35,000 at actual cash value. He has a detached greenhouse with heat and humidity control that houses his prized collection of exotic flowers. The flowers are valued at $11,000, and the greenhouse would cost $7,500 to replace at today’s prices. His policy has the following coverages:
Dwellings $60,000 Unscheduled personal property $30,000 Personal liability, per occurrence $25,000
A property coverage deductible of $250 per occurrence applies. Analyze each of the following situations in light of the above information. Determine all applicable coverage(s) and limit(s), and explain all factors that might affect the coverage provided by the policy.
- A windstorm causes $20,000 in repair cost damages to the house, and subsequent wind-blown rain causes damage to the contents of the house—$18,000 in replacement cost or $11,000 at actual cash value. The greenhouse is a total loss, as are the exotic plants. Debris removal of the greenhouse to satisfy the city’s health laws costs $350, and further debris removal to clear the way for repairs costs another $280. Two maple trees valued at $600 each are blown down, and their removal costs another $400. Bill must move his family to a nearby rental home for two months while repairs are made to the house. Rental costs are $600 per month, utilities at the rental house are $150 more per month, and the mortgage payments of $550 per month continue to be payable. It costs Bill another $80 per month to commute to work and to drive his children to school. The telephone company charges him $50 to change his telephone to the rental unit and back to his home again.
- After Bill and his family return to their home, faulty wiring installed during repair causes a short and a small fire. All the family clothing has to be washed because of smoke damage, at a cost of $1,200. Repair to the walls requires an additional $4,700. What might be the effect of subrogation in this case?
- What is the mortgage clause in the HO-3 policy?
- Ms. Gotcheaux’s home in San Francisco was damaged by an earthquake. The earthquake caused a gas line to explode and a fire broke out, completely destroying the house. Ms. Gotcheaux’s homeowners policy explicitly excludes coverage for any damage caused by earth movement. Nevertheless, she files a claim with her insurer under her HO-3 policy. As Ms. Gotcheaux’s insurer, how would you handle her claim?
Brenda Joy is an accountant in a small Kansas town. She works out of her home, which has a replacement value of $125,000 and an actual cash value of $105,000. Brenda purchased an HO-3 with the following limits:
Coverage A: $110,000, $250 deductible Coverage E: $300,000 Coverage F: $5,000
Discuss the application of Brenda’s HO-3 to the following losses.
- One of Brenda’s clients sues her for negligent accounting advice. The lawsuit alleges damages of $75,000.
- A friend of Brenda’s visits at Brenda’s home and trips over a stack of books Brenda laid on the floor temporarily. Brenda takes the friend to the hospital, where treatment costs $645.
- Brenda is the star pitcher for the local softball team. Unfortunately, Brenda’s game was off last month and she beaned an opponent. The opponent’s attorney filed a notice of claim against Brenda, asserting damages of $500,000.
- Neighborhood children often run through Brenda’s yard. Recently, a group did just that, with one child falling over a rock hidden in the grass. The child needed stitches and an overnight stay in the hospital. It is not clear if the child’s parents will sue.
- Where are exclusions found in the homeowners insurance policy? List some standard exclusions.
- Lisbeth is a college student living in a dorm. She has a television, DVD player, stereo, and a number of CDs and DVDs. She also has a lot of expensive clothing. Her parents’ homeowners policy provides $120,000 of protection for coverage A. Do you think Lisbeth should get her own policy to cover her personal property?
As a newly graduated lawyer, Quinn Krueger was able to find a well-paying job and, as a result, could afford a large enough mortgage to buy a nice house. The mortgage company required that Quinn also purchase a homeowners policy, and so Quinn obtained an HO-3 with $95,000 on coverage A (the replacement cost value), $60,000 for coverage C, $100,000 on coverage E, and $2,000 on coverage F. How would Quinn’s insurer react to the following losses? Explain.
- Coming home late one night, Quinn accidentally drives her car into the corner of her attached garage. Damage to the garage involves repairs of $2,300. The car needs repairs costing $3,200.
- Quinn owns an electric guitar and likes to play it loudly. Neighbors sue Quinn for nuisance, claiming damages of $25,000 (the reduction in the value of their house).
- Heavy snowfall, followed by rapid melting, results in high water levels. Quinn finds herself dealing with an overflow in her basement. It causes $2,700 in damage to personal property and requires repairs of $1,700 to the basement.
- Thieves are not common in Quinn’s neighborhood, but police believe that a group of crafty criminals broke into her house. The break-in damages the doorway, requiring $685 in repairs. The thieves take a Persian rug valued at $8,300, a television worth $500, jewelry assessed at $3,000, a CD player costing $450, and silverware worth $1,200.
- Homeowners insurance pays medical expenses under what circumstances?