Answered Essay: ABC Industries has a building and business personal property form on its building and business person

ABC Industries has a building and business personal property form on its building and business personal property. Here are the particulars:

Policy period 1/1/xx – 12/31/xx

Building limit of insurance: $500,000

Business personal property limit of insurance: $300,000

Deductible: $1,000 for both building and business personal property

Coinsurance: 80%

Inflation guard: 8%

Valuation of building: ACV

Valuation of business personal property: ACV

On march 30 (not a leap year) the company suffers total fire loss.

 The value of the building at time of claim at ACV is: $630,000

 The value of the building at time of claim at RCV is $840,000

 The value of business personal property at time of claim at ACV is $390,000

 The value of business personal property at time of claim at RCV is $425,000

How much was ABC paid each for building and business personal property. Show your work for each.

Debris removal in the claim for ABC amounted to $230,000. How much will ABC be paid. Show your work.

Expert Answer

 

Understanding the working of Insurance policy and claims:

The person who seeks insurance is called insured (public) and the person who offers insurance is called insurer (insurance company)

Limit of Insurance is the maximum amount that the insurance company shall be liable to pay at the time of mishap occurred.

Deductible is the amount to be met by insured initially.

Co-insurance clause states the amount of sharing between insured and insurance. For example, if co-insurance clause is 80/20, 80% is borne by Insurer and 20% is borne is insured.

Inflation guard is amount of increase in limit of insurance year on year.

Debris removal clause: Generally, Standard Fire Policy, will contain debris removal clause. It states that the coverage extends to include the cost of removal of debris. The debris removal charges will be within the limit of liability. It is not considered in complying co-insurance clause.

Statement showing amount of payment by ABC:

Sr. No. Particulars Building Business Personal Property
a. Limit of Insurance $ 500,000 $ 300,000
b. Deductible $ 1,000 $ 1,000
c. Co-insurance is 80%, Born by Insured is 20%. Outflow @ 20% $ 100,000 $ 60,000
d. Actual Cash Value (ACV) $ 630,000 $ 390,000
e. Replacement Cost Value (RCV) $ 840,000 $ 425,000
f. The amount paid by ABC – Outflow for Insured i.e., ABC (b+c) $ 101,000 $ 61,000

Therefore, the amount paid by ABC = $162,000 ($ 101,000 for Building + $ 61,000 for Business Personal Property)

Since debris removal charges is not considered for the co-insurance clause, the total amount of outflow for ABC will be $ 392,000 ($ 162,000 + $ 230,000)

Statement showing claim will be paid to ABC:

  1. Assuming the loss occurred on the first year of taking insurance
Particulars Amount $ Calculation
Limit of Insurance $ 800,000 ($ 500,000 + $ 300,000)
Amount to be borne by Insured (above) $ 162,000 ($ 101,000 + $ 61,000)
Amount to be paid to ABC $ 638,000 ($ 800,000 – $ 162,000)

Under first assumption, The total amount to be paid to ABC = $ 638,000

2. Assuming the loss occurred on the fourth year of taking insurance (taken fourth year because the amount of ACV will be approximately equal to the limit of insurance in the fourth year)

Particulars Amount $ Calculation
Limit of Insurance

(Raised to power of 3 to reflect the fourth year value)

$ 1,007,770 [{500,000*(1.08^3)}+{300,000*(1.08^3)}]

(629,856 + 377,914)

Amount to be borne by Insured (above) $ 162,000 ($ 101,000 + $ 61,000)
Amount to be paid to ABC $ 845,770 ($ 1,007,770 – $ 162,000)

Under second assumption, The total amount to be paid to ABC = $ 845,770

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