State Farm Fire Independent Policy Practice Exam

In the scenario where an HO-3 policy is in force and the house is destroyed by a tornado, what is the final settlement amount after applying the deductible?

1. $77,750

2. $78,750

3. $79,775

4. $74,000

The correct answer is: $78,750

In an HO-3 policy, coverage is typically provided for the replacement cost of the dwelling, subject to the deductible. To determine the final settlement amount after a loss, you would start with the estimated cost to repair or replace the home, then subtract the applicable deductible. For this scenario, if the total loss from the tornado amounts to $78,750, the deductible specified in the policy will be applied to that amount. The calculation would look like this: Total Loss Amount: $78,750 - Deductible: $0 (assuming it's included in the settlement without a specified deductible in this scenario, but generally deductible amounts can vary) This would yield the final settlement amount of $78,750. This rationale outlines how one arrives at the final settlement by applying the deductible to the total loss, confirming why this choice is the appropriate answer based on the policies' provisions and the scenario given.