About this video
A fire destroys a house that costs $350,000 to rebuild and $50,000 of contents. The video reads a sample homeowners policy (declarations, covered perils, exclusions, conditions and endorsements) and works out that the policy pays at most $380,000 against $436,000 of real costs, with a $10,000 deductible paid first.
You'll be able to
- read a declarations page to find coverage limits and the deductible.
- tell whether a loss is covered by checking covered perils and exclusions.
- work out how much a policy pays and how short it falls of the real costs.
Key words
- Declarations page
- The part of a policy listing the insured, property, term, coverage limits and deductible.
- Dwelling coverage
- Coverage A: the most the policy pays to rebuild the house itself.
- Replacement cost
- What it would cost to rebuild or replace something today.
- Loss of use
- Coverage that pays for somewhere to live while your home can't be used.
- Exclusions
- Events the policy does not cover, such as floods or earthquakes here.
- Endorsement
- Optional extra coverage added to customize a policy, like liability cover.
Transcript
- [Instructor] We're told a fire destroys your house and all your belongings, so, not a pleasant scenario, and you are provided with two key figures. The replacement cost of the house is $350,000. So that's what it would cost to go get a contractor and rebuild the house.
And the actual cash value of the contents is $50,000. So that's all the furniture and your electronics, et cetera, that you had inside of the house. How much will insurance pay you? Well, to answer that question, you have to look at your specific insurance policy, And we have here a potential insurance policy not too different than the types of insurance policies that you might see.
So it just starts off with just basic information about the company and yourself. In this case, we are John Doe. And let's look at the declarations page. This is some useful, interesting thing. "This section provides key details about the policy, including the insured, property location, policy term, coverage limits, and deductible amounts."
So this is really the money of it, no pun intended. So coverage A, it covers $300,000 on the dwelling. So of that 300... Let me write this down over here. So on the dwelling, so dwelling, our policy covers $300,000. And so you might already notice something. The house, to replace it, costs 350,000.
So we're already looking like we're going to be short. Other structures, $50,000. Well, it doesn't look like there's any other structures here. Other structures might be like a detached garage or a shed or something like that. Then it tells us personal property, $50,000.
So personal property is $50,000. That one looks pretty good because our personal property, the cash value of the contents, is $50,000. Loss of use, $30,000. So that might be, well, you might say, "What is that?" Well, you have no house to live in. You're going to have to go rent a house or rent an apartment someplace.
You need someplace to live. And so that's what loss of use covers. Loss of use is going to give you $30,000. And then your deductible is $10,000 per covered loss. So let me write this. The deductible, deductible, is $10,000 per covered loss, which means every time one of these events happen, you have to pay that $10,000 before the insurance is actually going to kick in.
And the premium is just what you've been paying every year in order to get this insurance. Now let's see what else is covered here, insurance agreement. "A covered loss is a type of damage or loss that the policy will compensate for. This policy covers losses caused by perils such as fire."
Well, that's the category that we're in. "Lightning, windstorm, hail, explosion, theft, and vandalism. So it's good. We're covered in this. But it's good to look at the exclusions here, flood or water damage, earthquakes, intentional damage by the insured. Well, you know, that's fraud in many cases.
Wear and tear, mold, mildew. So if this was a flood, or if this was an earthquake, you would not be covered by this insurance policy. And so let's see what else we have here. Whoops, let me go to the other one. It tells us conditions: "The insurance must notify EverTrust Insurance promptly in the event of a loss."
Okay, "The insured (indistinct) proof of loss and cooperate with the claims investigation." Someone's gonna show up and make sure that these losses are real. "Premiums must be paid on time." So if you happen to miss your payment, and then this happens, you might be in trouble.
"Any disputes must be resolved through arbitration," so if there's a disagreement about maybe what's covered or how much, go through arbitration. Endorsements, let's see. "The insured may add optional coverage to customize their policy." So these are extra things to add.
Liability insurance for 300,000 for bodily injury or property damage. That's if someone were to come into your house, and let's say you didn't repair your sidewalk or your driveway, and someone trips and falls, or there's a big hole in your front yard, and they sue you.
That's what liability is to cover. "A claim is a request by the insured for payment due to cover loss." Okay, cancellation. Okay, so I think we got all of the important information here. And so let's just see how it would play out for our particular situation.
So for our dwelling, we're going to get the full 300,000. Although we're still going to be 50K short, 50K short over there. We're going to get the personal property of $50,000 and then the loss of use. So there, it really is going to be, well, what type of rents are we going to have to pay while we rebuild this house?
And rebuilding this house might take, especially if many houses in the area were were affected, it might take a little while to rebuild the house. But it could take a year and a half, and you could easily spend $30,000 or more on rent in that year and a half because you don't have use of your house, and you need to have someplace to stay.
So let's assume that you're going to be able to use this entire loss of use. So they're going to cover $350,000 plus 30,000, so that would be $380,000, except for the fact that you have your deductible here, not accept, but you are going to have to pay out of pocket $10,000 first before this kicks in.
Now, let's just be clear what's going on here. The money that you needed was actually $400,000. That was the 350 plus the 50,000 plus your loss of use. So let's say you're going to go rent another place, rent for 18 months. Let's say when you go rent another place, let's say it's $2,000 a month.
If it's $2,000 a month, your rent for 18 months is going to be another $36,000. So here's a situation where you needed actually a total, if you add these two together, you have a total of $436,000 that you needed to be covered, but they're only going to cover 380,000 of it.
And even that, you're going to have to first put the $10,000 in before this over here is going to kick in.
Video © Khan Academy, used under CC BY-NC-SA. Watch on Khan Academy. Puzzicle is not affiliated with Khan Academy.