06. Valuation, Deductibles, Coinsurance

Question 1

Valuation

Answer 1

The process of estimating what an item is worth

Question 2

Q: what are four methods of valuation?

Answer 2

• actual cash value ( ACV )
• replacement cost ( RC )
• stated amount
• agreed value ( valued policy )

Question 3

Actual Cash Value

Answer 3

A valuation method that takes into account an item’s depreciation

• same as fair market value and depreciated value
• ACV offers lower premiums for less coverage
• formula: replacement cost minus total depreciation

Question 4

Replacement cost

Answer 4

A method of valuation based on the cost of replacing an item at current market prices, regardless of depreciation

• determined through simple market research

Question 5

Depreciation

Answer 5

An item’s estimated loss of value due to wear, tear, and age

• determined through standard depreciation schedules and estimating software

Question 6

Annual Depreciation

Answer 6

Replacement cost divided by the item’s useful life

Question 7

Accumulated Depreciation

Answer 7

The item’s annual depreciation multiplied by its age

Question 8

Broad Evidence Rule

Answer 8

• ACV does not simply come down to RC minus depreciation

- takes into consideration any evidence available to determine value

Question 9

Q: what are the characteristics of Replacement Cost

Answer 9

• no depreciation
• based on the replacement cost at the time of the loss
• higher premiums

Question 10

RC & the Principle of Indemnity

Answer 10

• the insured cannot profit from a loss

- the insurer often waits to pay the full amount until the insured submits proof of replacement

Question 11

Replacement Cost example

Answer 11

Roberto’s hail-destroyed roof:

• replacement cost (RC) of $10,000
• first check of $6,000 ACV
• Roberto replaces roof for $7,000
• So, insurer sends second check for only $1,000

( total indemnity for Roberto: $7,000
Insurer saves: $3,000)

Question 12

Functional Replacement Cost

Answer 12

• pays to replace an outdated, obsolete item with a functionally equivalent item - not an identical item
• level of coverage falls between RC and ACV

Question 13

Obsolescence

Answer 13

• when something is no longer used or wanted despite being in good working order
• usually a result of a newer, improved alternative
• causes rapid depreciation

( walls made of lath/plaster, VCR’s, portable CD players )

Question 14

Valued Policy ( a.k.a Agreed Value or Guaranteed Value )

Answer 14

A valuation method that assigns a set value to each insured item

• value is determined prior to the insurance policy
• avoids the confusion of assessing appreciation or depreciation

Question 15

Stated Amount ( Stated Value )

Answer 15

• property value is stated by the insured when applying for insurance
• when loss occurs, policy pays up to the stated amount of ACV, whichever is less

Question 16

Partial Loss

Answer 16

When insured property is only partly damaged, and repair costs fall within the policy limit

Question 17

Total Loss

Answer 17

When insured property is damaged so badly that it is not worth repairing

( two kinds: actual total loss, and constructive total loss )

Question 18

Actual Total Loss

Answer 18

When property is completely destroyed and unrepairable

Question 19

Constructive Total Loss

Answer 19

When the cost of repairing damaged property is higher than the property’s current value

( insurer may keep the damaged property or deduct its salvage value from the claim )

Question 20

Fixed Deductible

Answer 20

A specific, set amount

• Tom’s fixed deductible: $500
• covered damages: $3,500
• Tom’s insurer pays: $3,000
• Tom pays: $500

Question 22

Percentage Deductible

Answer 22

The insured pays a percentage of the insured risk’s value

• Karen’s home insured for: $500,000
• percentage deductible: 3%, or $15,000
• covered damages: $25,000
• Karen pays the first $15,000; insurer pays the balance of $10,000

Question 23

Franchise Deductible

Answer 23

Policy kicks in only after the loss exceeds a predetermined amount

( if losses are below the deductible, the insurer pays nothing )
( if losses are above the deductible, the insurer pays 100% of the damage )

• franchise deductible: $1,000
• total damages: $1,200
• insurer pays: $1,200
• insured pays: $0

Question 24

Coinsurance

Answer 24

Encourages the insured to purchase an adequate amount of coverage, typically at least 80% of a property’s value

• financially protects the insurer
• imposes a penalty on coverage for partial losses if the property is not fully insured - 80% of its RC

Property value: $100,000
Co insurance amount: $80,000 ( 100,000 x 80% )
Underinsured: policy limit less than $80,000

Question 25

Underinsured

Answer 25

When a home is insured for less than 80% of its value

Question 26

Coinsurance policy

Answer 26

If a property is underinsured, the insurer will only cover a percentage of partial losses

• if multiple partial losses occur, the low premiums are not enough for the insurer to cover all the damages
• the insurer decides if a coinsurance penalty should be applied

Question 27

How to calculate coinsurance

Answer 27

• Value of dumb bitches house: $100,000
• minimum coinsurance amount: $80,000
• dumb bitches actual coverage: $40,000

$40,000 ( actual coverage ) / $80,000 ( coinsurance requirement ) = 50%

Apply penalty to partial losses

• home suffered partial loss of $10,000
• coinsurance penalty: 50%
• insurer will only pay $5,000 (50% of $10,000)

Question 28

Deductible

Answer 28

The amount the policyholder must pay out of pocket before the insurer will pay for losses

• let’s the policyholder decide how much risk he is willing to take
• found on the declarations page of a policy

( three types: fixed, percentage, franchise )
( liability insurance NEVER uses a deductible)