Elements of Typical Homeowners' Insurance Policies - Part 5: Practice Questions and Solutions

This section of the study guide is intended to provide practice problems and solutions to accompany the pages of Personal Insurance, cited below. Students are encouraged to read these pages before attempting the problems. This study guide is entirely an independent effort by Mr. Stolyarov and is not affiliated with any organization(s) to whose textbooks it refers, nor does it represent such organization(s).

Some of the questions here ask for short written answers based on the reading. This is meant to give the student practice in answering questions of the format that will appear on Exam 5. Students are encouraged to type their own answers first and then to compare these answers with the solutions given here. Please note that the solutions provided here are not necessarily the only possible ones.

Source:
Nyce, Charles, ed. Personal Insurance. (Second Edition). 2008. Chapter 5, pp. 5.39-5.51.

Original Problems and Solutions from The Actuary's Free Study Guide

Problem S5-109-1.

(a) Under the Appraisal condition of a typical HO-3 homeowner's insurance policy, how is a determination of the amount of the loss made if the insurer and the insured disagree?

(b) Under the Appraisal condition of a typical HO-3 homeowner's insurance policy, who pays the various entities involved in the appraisal process?

Solution S5-109-1. This problem is based on the discussion in Personal Insurance, p. 5.39.

(a) If the insurer and insured disagree as to the amount of the loss, under the Appraisal condition, each party will select its own appraiser, and the appraisers will prepare independent estimates of the amount of the loss. If the two appraisers disagree, they would submit their disagreement to an umpire. Any decision reached by two of these three individuals will determine the official amount of the loss.

(b) The insurer and the insured each pay the costs of the appraiser they hire. The cost of the umpire is shared between the insurer and the insured.

Problem S5-109-2. Mr. Omicron's chair is covered under a warranty that will pay for any loss to the chair of up to $300. Mr. Omicron also has two HO-3 homeowners' insurance policies. Policy X has a deductible of $500 and a Coverage C: Personal Property limit of $50,000. Policy Y has a deductible of $200 and a Coverage C: Personal Property limit of $100,000.

When Mr. Omicron's chair was destroyed by a windstorm, it was determined that the chair was in fact a valuable collectible item with an actual cash value of $30,000.

(a)How much will Mr. Omicron be reimbursed for the loss of the chair under Policy X?

(b) How much will Mr. Omicron be reimbursed for the loss of the chair under Policy Y?

Solution S5-109-2. This problem is based on the discussion in Personal Insurance, p. 5.40.

The relevant policy conditions here are the Service Agreement and Other Insurance conditions. The Service Agreement condition states that the HO-3 policy is excess over any applicable service plan or warranty. Thus, the warranty will pay Mr. Omicron $300, and the remaining amount of the loss: $29,700, is the only amount that even needs to be considered with regard to reimbursements under the insurance policies.

(a) The Other Insurance condition specifies that losses between two applicable insurance policies will be shared proportionally according to those policies' limits.

For Policy X, the reimbursable loss will be 29700*(50000/(50000 + 150000)) = $9,900. From this, the deductible of $500 is subtracted, meaning that Policy X will reimburse Mr. Omicron in the amount of $9,400.

(b) The Other Insurance condition specifies that losses between two applicable insurance policies will be shared proportionally according to those policies' limits.

For Policy Y, the reimbursable loss will be 29700*(100000/(50000 + 150000)) = $19,800. From this, the deductible of $200 is subtracted, meaning that Policy Y will reimburse Mr. Omicron in the amount of $19,600.

Problem S5-109-3.

(a) Under a typical HO-3 homeowner's insurance policy, in what situations may an insured bring a legal suit against the insurer?

(b) Mrs. Ψ's lamp is destroyed in a fire, and Mrs. Ψ files a claim for the lamp under her HO-3 policy, hoping to get reimbursed the actual cash value of the lamp, for which she can purchase a new table instead. However, instead of receiving monetary compensation, Mrs. Ψ receives from her insurer a lamp that is identical to the lamp that was destroyed. Upset, Mrs. Ψ alleges that the insurer has violated the terms of the policy. Is she correct?

Solution S5-109-3. This problem is based on the discussion in Personal Insurance, pp. 5.40-5.41.

(a) Under a typical HO-3 homeowner's insurance policy, an insured may only bring a legal suit against the insurer if (1) the insured has complied with all policy provisions and (2) action on the suit is started no more than two years after the loss occurred.

(b) Mrs. Ψ is not correct. The Our Option condition of a typical HO-3 homeowner's insurance policy gives the insurer the ability to choose whether to reimburse the insured for the damaged property, or to repair or replace the property.

Problem S5-109-4.

(a) Mr. Retsim owns a house which is completely destroyed in a fire. He was reimbursed by the insurer for the actual cash value of the house under his HO-3 homeowner's insurance policy. He does not want to clean up the debris left over from the fire, and he does not want to incur the liability of children playing in the rubble. Thus, he reasons that because the insurer paid him for a total loss, the insurer now necessarily owns the property, and Mr. Retsim can walk away with no further obligations. Is he correct?

(b) What rights would a mortgagee have under a typical mortgage clause in an HO-3 homeowner's insurance policy?

Solution S5-109-4. This problem is based on the discussion in Personal Insurance, p. 5.41.

(a) Mr. Retsim is not correct. The Abandonment of Property condition of a typical HO-3 homeowner's insurance policy explicitly states that the insurer is not required to take responsibility for a property that the insured abandons, even if the insurer has paid for a total loss to that property.

(b) Under a typical mortgage clause in an HO-3 homeowner's insurance policy, the mortgagee has the following right:

1. The right to have payment for a loss be made jointly to the mortgagee and the insured;

2. The right to collect from the insurer the mortgagee's insurable interest in the property if the insurer denies the insured's loss;

3. The right to receive notice of policy cancellation or nonrenewal a specified number of days before said cancellation or nonrenewal would take effect.

Problem S5-109-5.

(a) A nuclear power plant accident results in a fire that damages Mr. Δ's house. Mr. Δ has a typical HO-3 homeowner's insurance policy, but his insurer denies him coverage for the loss, referring to the nuclear hazard exclusion in the policy. Mr. Δ contests this decision and argues that he actually has coverage for the loss. Is he correct?

(b) Mr. Onaclov's HO-3 homeowner's insurance policy covers his dwelling up to a limit of $400,000. His deductible is $1000. There is no coinsurance penalty. There are five volcanic eruptions in short succession:

Eruption 1 causes $50,000 in damage to Mr. Onaclov's house.

Eruption 2 occurs 5 hours after Eruption 1 and causes $200,000 in damage to the house.

Eruption 3 occurs 50 hours after Eruption 1 and causes $200,000 in damage to the house.

Eruption 4 occurs 100 hours after Eruption 1 and causes $70,000 in damage to the house.

Eruption 5 occurs 123 hours after Eruption 1 and causes $50,000 in damage to the house.

How much will Mr. Onaclov receive from the insurer?

Solution S5-109-5. This problem is based on the discussion in Personal Insurance, p. 5.42-5.43.

(a) Mr. Δ is correct. The Nuclear Hazard Clause in a typical HO-3 homeowner's insurance policy specifically state that there exists coverage for direct losses from a fire that results from a nuclear hazard.

(b) According to the Volcanic Eruption Period condition of a typical HO-3 homeowner's insurance policy, multiple volcanic eruptions within a single 72-hour period are considered to be one eruption for the purposes of applying coverage limits and deductibles. The first three eruptions occurred within a 72-hour period and so are considered one eruption. Likewise, Eruptions 4 and 5 occurred within a 72-hour period of one another and so are considered one eruption.

For Eruptions 1, 2, and 3, the total loss is 50000 + 200000 + 200000 = $450,000. Of this amount, Mr. Onaclov only receives coverage up to the limit of $400,000, minus the deductible of $1000 - a total of $399,000.

For Eruptions 4 and 5, the total loss is 70000 + 50000 = $120,000, minus the deductible of $1000 - a total of $119,000.

Thus, Mr. Onaclov will be reimbursed 399000 + 119000 = $518,000.

See other sections of The Actuary's Free Study Guide for Exam 5.