Scenario: You own a home with a market value of $245,000. Of this amount, $30,000 is apportioned to the land and $215,000 is apportioned to the house. It is estimated that the house would cost $190,000 to rebuild.
The personal property in your home is worth $70,000, including a $2,000 diamond ring and a $3,000 computer system. You also own a car worth $20,000. You live in a state where there is a high risk for earthquakes. You have $100,000 in savings and investments that could be drawn on in case of emergency.
You currently have a standard HO-3 homeowner's policy with a $500 deductible, which insures your house for $245,000 and your personal belongings for $130,000, and you carry the minimum requirements of your state for car insurance. You have been advised to adjust your insurance coverage based on the large-loss principle.
1. According to the large-loss principal, you should:
insure only those risks that you cannot afford to cover using your own financial resources
insure your property for minimum amounts only
insure your property for the maximum amount available
transfer all risks possible to insurance
2. Based on the large-loss principle and your particular situation, a ($0, $500, $1,000, $5,000) deductible is most appropriate for your homeowner's policy.
3.Given your current insurance coverage, in the event of a fire, your house and household belongings are over-insured by ($145,000, $90,000, $55,000, $30,000).
4. If you were to reduce the coverage on your home to its replacement value of $190,000, then your personal property coverage could also be reduced to ($95,000, $66,500, $114,000, $76,000). This is because the minimum personal coverage available on a HO-3 policy is (35%, 40%, 50%, 60%) of the home coverage.
5. In what area is the coverage on the home itself severely lacking?
The deductible should be reduced
Earthquake damage, which is not included in a standard homeowner's policy
Volcano damage, which is not included in a standard homeowner's policy
Fire damage, which is not included in a standard homeowner's policy
6. In what area is the coverage of your personal property particularly inadequate?
You need a special rider to protect your diamond ring, since the standard maximum coverage is $1,000 per occurrence.
Your personal property coverage is not inadequate; your HO-3 policy fully protects both your diamond ring and your computer system.
You need a special rider on the computer system, since the standard maximum is $2,000 per occurrence.
Your policy can be improved by adding additional riders for both your ring and your computer system.
7. If your personal belongings are all reduced to ashes in a fire, what is the best way to document your loss?
Prepare and safeguard a visual (video or photographic) inventory that is kept in a safe deposit box.
Show pictures of the ashes from the fire and request the full amount of coverage.
Provide from your memory a list of your belongings and their worth.
Provide the report from the fire department.
8. In addition to coverage for your house and personal property, the standard HO-3 homeowner's policy also covers: Check all that apply.
Each tree, shrub, or plant is covered up to 5% of the value of the home.
Loss of use and/or additional living expense coverage up to 20% of the value of your home
Money, coins, currency, and precious metals are covered up to $20,000 for a calendar year.
Comprehensive personal liability coverage up to $300,000 per occurrence
8. If you have a small loss, why might you decide to not report it to your insurance? Because ... Check all that apply.
You don't have the necessary documentation to prove the loss
You wouldn't fail to report a claim to your insurance company.
Your insurance premium may increase for the next several years, which may, in the long run, cost you more than the amount of the loss
9. Think about the liability coverage provided by your homeowner and automobile policies. If you ascribe to the large-loss principal, then you should:
Plead with your agent to increase your coverage even though insurance companies don't provide additional coverage beyond the standard limit
Hire an insurance consultant to help identify ways to reduce your liability exposure.
Significantly increase your liability coverage beyond the minimum limits that you currently carry
Keep your coverage at the minimum levels that you currently carry
10. You are thinking about adopting a guard dog, believing that the dog will lower the risk of a theft, vandalism, or malicious mischief insurance claim. You should remember that:
There is a special discount for dog owners.
If you report the dog ownership, your insurer may immediately drop you.
Approximately one-third of homeowner's insurance liability claims are associated with dog bites.
You are not required to report the dog ownership to your insurance, but an agent or company representative may ask if you have a dog the next time you renew your coverage or initiate a new policy.
11. If you were to total your car in an accident at which you are at fault, your insurance company is likely to pay ($0, $20,000, $19,500) to repair your car. This is because (the car is totalled as opposed to only slightly damaged, state minimum coverage does not include collision coverage, the accident is your fault.)
12. Assume your state's minimum liability limits for an automobile policy are 25/50/10. Next assume that you cause an accident that involves multiple injuries to three people, each with medical expenses of $225,000. The maximum bodily injury payout that could be made on your behalf by your insurance company for this accident is ($600,000, $50,000, $150,000, $75,000, $1,000,000, $25,000, $500,000)
13. Based on the large-loss principle, should you modify your existing automobile insurance coverage?
Yes, increasing both the amount of liability coverage carried and the comprehensive and collision coverages added to the policy.
Yes, but only add comprehensive and collision coverages to the existing policy.
Yes, but only increase the amount of liability coverage to the existing policy
No, don't change your existing policy.