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Chapter 13.3

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Shijie Peng

on 6 March 2015

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Transcript of Chapter 13.3

Dayton Properties owns a small apartment building with a replacement cost of $760,000. The fire insurance policy has an 80% coinsurance clause and a face value of $570,000. A fire started in the kitchen of a tenant and swept through three apartments, resulting in $144,000 in losses. Find the amount of the loss that the insurance company will pay.
Define the terms
face value
, and
Find the annual premium for fire insurance.
Use the coinsurance formula.
Understand multiple-carrier insurance.
List additional types of insurance coverage.
Find the annual premium for fire insurance.
type of construction of the building
contents and use of the building
location of the building
type and location of any fire protection that is available
Use the coinsurance formula.
Replacement cost
– refers to the cost to replace (rebuild) a building in the event it is completely destroyed (many buildings cost more to rebuild than fair market value)
Coinsurance clause
– clause that requires the owner to have an insurance policy in effect with a face value that is at least 80% of the replacement cost of the building
Understand Multiple Carrier Insurance
Define the terms policy, coverage, face value, and premium.
— contract between an owner of a building and an insurance company
— protection for both owner of building and mortgage company
face value
— dollar value of the insurance coverage
— annual cost of the policy
Chapter 13.3
fire insurance

Henry Xiao
Howard Hao
Robert Cui
Jessica Peng

– insurance company employees who assign a classification to a building

Territorial ratings
– rating that describes the quality of fire protection in the area

The Doll House is in a building rated class C. It is in territory 4. Find the
annual premium
if the replacement cost of the building is $640,000 and the contents are valued at $186,500.
$1,480,000 ÷ 100 = 14,800
14,800 ×$ .92 = $13,616

$110,000 ÷ 100 = 1100
1100 × $ .99 =$ 1089

$13,616 + $1089 = $14,705
Quick Check 1
face value > 80%
pays for all losses caused by a fire

face value < 80%
pays only a portion of any loss

the smaller amount of the loss on the face value
the most the insurance company will pay
Amount insurance company will pay (assuming 80% coinsurance)
= Amount of loss ×
Amount of policy
80% of replacement cost
Example 2
Quick Check 2
Quick Check 3
$8,400,000 × 80% = $6,720,000
$6,720,000 > $5,600,000
$2,300,000 × $5,600,000 ÷ $6,720,000 = $1,916,666.67
$1,600,000 × 80% = $1,280,000
$1,280,000 <$ 1,400,000
A business may have policies with several companies at the same time (additional policies may cover additions to the building, or perhaps the building is so large one carrier does not want to cover the entire building
Each carrier pays its fractional portion of the total claim on the property
List Additional Types of Insurance Coverage
– pays monthly payments in the event of disability
– pays a homeowner in the event of fire, theft, or accidents
– protects business owners against lawsuits
Long-term care
– pays for nursing home costs
– pays for medical expenses
– protects a renter against loss of personal property
Worker’s compensation
– pays employees for injuries while on the job
– protects against risk: fire, theft, liability (against a law suit or catastrophic event), auto accidents or liability, life (death)
Youngblood Apartments has an insured loss of $1,800,000 while having insurance coverage beyond its coinsurance requirement. The insurance is divided among Company A with $5,900,000 coverage, Company B with $4,425,000 coverage, and Company C with $1,475,000 coverage. Find the amount of the loss paid by each of the insurance companies.
Example 4
A Swedish investment group owns a warehouse with a replacement cost of $3,450,000. The company has a fire insurance policy with a face value of $3,400,000. The policy has an 80% coinsurance feature. If the firm has a fire loss of $233,500, find the part of the loss paid by the insurance company.

Example 3
Full transcript