The Victorian Underinsurance Claim
The Whitcombs own a 1908 Victorian in Portland, Oregon. Their HO-3 shows Coverage A $420,000, Coverage B $42,000, Coverage C $210,000, Coverage D $126,000, Coverage E $300,000, Coverage F $5,000, and a $2,500 deductible. The agent's replacement-cost estimator puts the dwelling at $600,000. In November a kitchen fire spreads into the second floor, causing $120,000 in replacement cost and $84,000 in actual cash value damage to the dwelling. During the fire, a thief enters through the open front door and takes Nadia's 4-carat engagement ring, appraised at $9,500, plus $1,200 in cash from a drawer. The family moves into a rental for four months; their normal living expenses are $3,400 a month, and the rental plus extra meals and mileage costs $5,600 a month. Nadia's fur coat, actual cash value $3,000 and replacement cost $7,000, is smoke-damaged beyond repair. The carrier has not yet inspected and asks for a sworn proof of loss.
1. Calculate the maximum the carrier owes for the dwelling damage under the HO-3 loss settlement condition, showing each step. Assume the Whitcombs repair the dwelling.
Read the worked answer
Step 1: 80% of replacement cost = 0.80 × $600,000 = $480,000. Step 2: Coverage A carried is $420,000, which is less than $480,000, so the loss-settlement formula applies. Step 3: ratio = $420,000 ÷ $480,000 = 0.875. Step 4: formula amount = 0.875 × $120,000 = $105,000. Step 5: compare with ACV of $84,000; the greater is $105,000. Step 6: apply the $2,500 deductible = $102,500. The policy limit of $420,000 is not reached. If the Whitcombs had carried $480,000, the payment would have been $120,000 − $2,500 = $117,500. The $17,500 difference is the coinsurance penalty, not a 'fine' but a reduction required by the loss settlement condition.
2. Calculate the personal property payment for the ring, cash, and fur coat, applying special limits and the deductible. State any assumptions.
Read the worked answer
Ring: theft of jewelry is subject to a $1,500 special limit, so the $9,500 appraisal does not control; $1,500. Cash: money is limited to $200, so $200. Fur coat: it was smoke-damaged, not stolen, so the theft sublimit does not apply; Coverage C pays actual cash value, $3,000. Total before deductible = $1,500 + $200 + $3,000 = $4,700. Apply the $2,500 deductible once per occurrence = $2,200. Assumptions: the ring is not scheduled, the coat is not scheduled, and the loss is one occurrence. Scheduling the ring would pay the appraised value up to the scheduled limit and usually avoid the deductible; the cash limit cannot be increased by scheduling.
3. Calculate the Coverage D payment for the four months and explain why the full $5,600 monthly cost is not the measure.
Read the worked answer
Coverage D pays the increase in living expenses necessary to maintain the family's normal standard of living, not the full cost of the substitute housing. Increase = $5,600 − $3,400 = $2,200 per month. Four months = $8,800. The $126,000 Coverage D limit and the form's 24-month limit are not exhausted. The family must document receipts; continuing normal expenses such as the mortgage still count in the $3,400 baseline. If the home is repaired sooner, payments stop; if the rental is more expensive than necessary, the carrier may question the excess.