A house is insured for $240,000 dwelling coverage. The loan is $285,000 and the appraiser puts replacement cost at $262,000. If the applicable policy requires full replacement-cost dwelling coverage, what insured amount is needed?
Correct Answer
B) Raise it to $262,000: coverage tracks replacement cost, not the balance
B. The stated replacement-cost requirement calls for $262,000 of dwelling coverage. Use the stipulated rebuilding-cost figure rather than substituting the mortgage balance. The current $240,000 is $22,000 below the stated requirement. The information does not establish why the loan balance differs from rebuilding cost. Scope and exceptions: This tests a supplied coverage requirement, not a universal lending or insurance minimum. Actual coverage, exclusions and deductibles require the policy and applicable requirements. Source: Replacement cost value compared with actual cash value and market value — https://content.naic.org/article/whats-difference-between-actual-cash-value-coverage-and-replacement-cost-coverage
Why This Is the Correct Answer
B. The stated replacement-cost requirement calls for $262,000 of dwelling coverage. Use the stipulated rebuilding-cost figure rather than substituting the mortgage balance. The current $240,000 is $22,000 below the stated requirement. The information does not establish why the loan balance differs from rebuilding cost. Scope and exceptions: This tests a supplied coverage requirement, not a universal lending or insurance minimum. Actual coverage, exclusions and deductibles require the policy and applicable requirements.
Why the Other Options Are Wrong
Option A: Raise it to $285,000, because coverage must equal the loan amount
It substitutes $285,000 of debt for the stated coverage basis.
Option C: Leave it at $240,000, since any coverage satisfies the lender's interest
Any positive coverage does not satisfy the specified amount.
Option D: Raise it to $285,000 and add flood coverage for the difference in value
Adding another type of coverage does not change the stated dwelling-limit calculation.
Exam Tip
Loan balance, market value and rebuilding cost are different quantities.
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