Assume that the physical property of a business is valued at $50,000. The company's commercial property policy contains a coinsurance clause with a stated percentage of 80 percent. The company insures the property for $30,000 (75 percent of the specified minimum). The company incurs a fire loss of $20,000. How much of the loss will the insurance company pay for?
A) $20,000
B) $15,000
C) $0
D) $10,000

Question

Quizplus · Accepted Answer

The coinsurance formula is applied to determine the payable amount of the loss. The formula is:

insurance carried ÷ insurance required = loss payment

Insurance carried is $30,000 and insurance required is 80% of $50,000, which is $40,000. So:

$30,000 ÷ $40,000 = 0.75

The result of 0.75 is less than the required coinsurance percentage of 0.80, which means that the insured is considered a co-insurer. As a result, the insurance company will pay only that fraction of the loss which the insured's policy limit bears to the insurance required. Therefore, the insurance company will pay:

0.75 × $20,000 = $15,000

The insured is responsible for paying the remaining $5,000 of the loss.

Assume That the Physical Property of a Business Is Valued