California Property & Casualty Broker-AgentProperty InsuranceMedium
A homeowner's dwelling is valued at $400,000. Their HO-3 policy has Coverage A (Dwelling) for $300,000. If a fire causes $100,000 in damage to the dwelling, and the policy has an 80% coinsurance clause, how much will the policy pay, assuming no deductible?
- A$100,000
- B$75,000
- C$60,000
- D$93,750
Show answer & explanationAnswer & explanation
Correct answer: D. $93,750
The required coverage is 80% of $400,000 = $320,000. The insured carried $300,000. The coinsurance penalty is (Amount Carried / Amount Required) * Loss = ($300,000 / $320,000) * $100,000 = $93,750.
Why the other options are wrong
- A. This would be paid if the policy met the coinsurance requirement or if there was no coinsurance clause.
- B. This incorrectly applies a direct percentage to the loss without considering the coinsurance formula.
- C. This is an incorrect calculation that does not follow the coinsurance formula.
Coinsurance Clause (Property)
A provision in property insurance policies requiring the insured to maintain a certain percentage of coverage (e.g., 80%) relative to the property's value. Failure to do so results in a penalty, where the insurer pays only a proportionate share of a partial loss.
- Encourages adequate coverage amounts.
- Applies to partial losses; total losses typically pay up to policy limit.
- Formula: (Amount Carried / Amount Required) * Loss - Deductible
Memory trick: Always Calculate Relative Value First, Then Pay Less.