# Student Question of the Week: Underinsured on Homeowners Insurance

Student Question from Mark P
Course:  Insurance Planning

## Student Question:

In the question below, if the ACV had been over \$300,000, would she have received that amount?  I know the correct answer is \$281,250, but what if the ACV had been over \$300,000?

Jill owns a home that has a market value of \$500,000, a replacement value of \$400,000, and an “actual cash value” for insurance purposes of \$260,000. Her house burns down. She has insured the house for \$300,000. As a result of the total loss, how much will her insurance pay?

• \$400,000
• \$360,000
• \$320,000
• \$300,000
• \$281,250

## Instructor Response:

Hi Mark!

Great to hear from you.  The short answer is no.  Because the insurer will never pay you more than the amount you have the home insured for.

However, when the home is insured for less than 80%, the insured will receive the larger of:

1. “Actual cash value” of the part of the building damaged (the replacement cost less any depreciation at the time of its damage or loss), OR
2. Amount of insurance carried ÷ (80% x replacement cost of dwelling) x replacement cost of loss

Therefore, if the ACV is greater than the \$281,250 (this is number 2 above) we calculated in the question, she would then get that amount – but ONLY up to the insured amount of \$300,000.

Hope that helps.  Talk to you soon!