Florida 2-20 General Lines Agent (Property, Casualty, Commercial Lines and Florida Law)Florida Law and EthicsHard
A Florida 2-20 General Lines Agent is explaining the concept of 'Coinsurance' to a commercial client who is purchasing property insurance for their building. The building has a replacement cost of $1,000,000. The policy includes an 80% coinsurance clause. If the client insures the building for $700,000 and later suffers a $100,000 partial loss, how much will the insurer pay, assuming no deductible?
- A$70,000
- B$100,000
- C$87,500
- D$80,000
Show answer & explanationAnswer & explanation
Correct answer: C. $87,500
The coinsurance formula is (Amount of Insurance Carried / Amount of Insurance Required) x Loss. Required Insurance = $1,000,000 (Replacement Cost) x 80% (Coinsurance Clause) = $800,000. Payment = ($700,000 / $800,000) x $100,000 = 0.875 x $100,000 = $87,500.
Why the other options are wrong
- A. This would be ($700,000 / $1,000,000) * $100,000, which ignores the coinsurance requirement in the denominator.
- B. This would only be paid if the client met the coinsurance requirement or if there was no coinsurance clause, which is not the case.
- D. This would be if the coinsurance penalty was applied directly to the loss based on the percentage difference (e.g., 80% of $100,000), which is incorrect.
Coinsurance Clause (Property)
A coinsurance clause in property insurance requires the insured to carry a certain percentage of the property's value (e.g., 80%) in coverage; otherwise, they become a coinsurer and share in partial losses.
- Encourages adequate coverage.
- Applies to partial losses.
- Formula: (Amount Carried / Amount Required) x Loss - Deductible.
Memory trick: CAR = Coinsurance Amount Required