Solve the problem.
-Custom Dry Cleaners owns a building with a replacement cost of $239,000 which is insured for $162,520 with an 80% coinsurance clause. The building has a fire loss of $10,100. How much will the insurance company pay?

Question

Quizplus · Accepted Answer

To determine how much the insurance company will pay, we need to calculate if the policyholder satisfied the coinsurance requirement. In this case, the coinsurance requirement is 80%, which means the policyholder must insure the building for at least $191,200 (80% of $239,000). However, the policyholder only insured the building for $162,520, which is less than the required amount. Therefore, the policyholder is considered underinsured and will be penalized for any loss.
To calculate the amount the insurance company will pay, we use the following formula: 
(Insurance carried / Insurance required) x Loss = Payment
($162,520 / $191,200) x $10,100 = $8,585
Therefore, the insurance company will pay $8,585, which is option D. To calculate the amount of insurance coverage required, we need to multiply the replacement cost by the coinsurance percentage (80% = 0.8). 
So, the required coverage is: 
0.8 x $239,000 = $191,200

Since the building is insured for $162,520, which is less than the required coverage of $191,200, the insurance policy has a coinsurance penalty. 
To calculate the amount of the penalty, we need to use the following formula:

Amount of Loss x (Amount of Insurance carried / Amount of Insurance required) = Insurance Payment

Plugging in the numbers: 
$10,100 x ($162,520 / $191,200) = $8,584.60

Therefore, the insurance company will pay $8,585. Answer choice D is the correct answer.

Solve the Problem. -Custom Dry Cleaners Owns a Building with a Replacement Cost