One Storm, Three Losses, One Teenager
The Okafors hold an HO-3 with Coverage A of $420,000, Coverage C at 50%, a $2,000 all-perils deductible, a 2% windstorm deductible, a $10,000 water backup endorsement, and a $25,000 scheduled jewelry endorsement. Their ring is appraised at $40,000. Their personal auto policy shows 250/500/100 limits and a $1 million umbrella whose stated underlying requirement is 250/500/100. In September a tropical storm strips the roof ($38,000 to replace) while four inches of water back up through a floor drain into the finished basement, damaging finishes and contents ($22,000). The ring is lost that same week. Two months later their 17-year-old, who occasionally delivers food booked through a phone app in the family car, runs a red light and injures a pedestrian: $180,000 in medicals and $60,000 of property damage.
1. Calculate what the homeowners policy pays for each of the three property losses and what the family absorbs. State your assumptions about deductible application.
Read the worked answer
Roof (wind).
- Wind deductible = 2% × $420,000 = $8,400
- Payment = $38,000 − $8,400 = $29,600 (insured absorbs $8,400)
Basement water.
- This is a separate occurrence from the wind loss.
- Backup endorsement limit $10,000; assuming the $2,000 policy deductible applies on top of the endorsement limit, payment = $8,000 (some forms make the limit inclusive of the deductible - read the form; that changes the answer by $2,000).
- Insured absorbs $22,000 − $8,000 = $14,000
Ring.
- Scheduled at $25,000, no deductible → payment $25,000; insured absorbs $15,000 of the $40,000 appraised value.
Totals. Insurer pays roughly $62,600 (or $64,600 on the inclusive-limit reading); the family absorbs roughly $37,400.
Judgment point. The HO-3 flood exclusion would have barred the basement loss entirely - the backup endorsement is what responds, and only because the water came through a drain rather than overland. The ring loss shows the cost of scheduling at a stale value: a scheduled item is paid at the scheduled amount, so a $15,000 gap opens the day the appraisal rises.
2. Analyze the auto liability exposure. Who pays, and where are the gaps?
Read the worked answer
On its face, the PAP covers it.
- Bodily injury $180,000 < $250,000 per-person limit → paid in full
- Property damage $60,000 < $100,000 → paid in full
- The umbrella is not triggered because the underlying limits were not exhausted; the 250/500/100 requirement is satisfied
Where it breaks.
- Most PAPs exclude use of a vehicle to carry persons or property for a fee, including food delivery. If the exclusion applies, the carrier may deny, and the family is personally exposed to roughly $240,000.
- The umbrella typically follows the underlying policy's exclusions and has its own business-pursuits exclusion, so it may not drop down to fill the hole.
- The app's commercial auto policy sometimes covers the driver only during an active delivery assignment; outside that window there may be no coverage at all.
Action. Tender to both carriers immediately with a written reservation of rights request, obtain the app's certificate and coverage terms, and do not let the client give a recorded statement before coverage positions are known. Advise the family that the teen's use materially changes the risk and must be disclosed at renewal.
3. Recommend a coverage restructure at renewal and prioritize the changes.
Read the worked answer
Rank by severity of unprotected exposure, not by premium:
- Auto business-use gap. Confirm whether the app provides contingent liability; if not, either prohibit delivery use or buy a commercial policy/endorsement. This is the only exposure with six-figure personal liability attached.
- Basement water. Raise the backup limit to $25,000–$50,000 and add flood coverage (NFIP plus a difference-in-conditions form for the contents and finishes the NFIP caps won't reach). Backup and flood are different perils; buying one does not fix the other.
- Scheduled jewelry. Re-schedule the ring at $40,000 or move to a blanket jewelry limit with a per-item cap; confirm whether mysterious disappearance is included.
- Umbrella adequacy. At $180,000 per injury for a pedestrian struck at speed, $1 million is thin; $2 million is inexpensive incremental protection and also cushions the underlying-limit requirement if the auto limits are ever reduced.
- Deductible optimization. The 2% wind deductible cost $8,400 of a $38,000 loss. Show the client the premium credit for 1% versus 5% and let them price their own risk tolerance; also confirm whether the carrier offers a single deductible buy-back.
Judgment point. Do not present this as a package of endorsements. Present it as a retention schedule: here is what you paid out of pocket last quarter, here is what a repeat would cost, here is the cost to transfer it.