Texas General Lines — Property and CasualtyProperty and Casualty Insurance BasicsHard
An insured owns two identical commercial buildings, each valued at $1,000,000. Building A is insured by Company X for $800,000, and Building B is insured by Company Y for $800,000. Both policies contain a 90% coinsurance clause. If Building A suffers a $100,000 covered loss, and Building B suffers a $100,000 covered loss, how much will the insured receive for the loss to Building A, assuming no deductible?
- A$80,000
- B$90,000
- C$88,889
- D$100,000
Show answer & explanationAnswer & explanation
Correct answer: C. $88,889
The required insurance is $1,000,000 (value) * 90% (coinsurance) = $900,000. The insured carried $800,000. The penalty is (Amount Carried / Amount Required) * Loss = ($800,000 / $900,000) * $100,000 = $88,888.89, which rounds to $88,889.
Why the other options are wrong
- A. This calculation is incorrect for the given scenario.
- B. This would be the payment if the coinsurance requirement was 80% or if the insured carried exactly $900,000.
- D. This would be paid if the coinsurance clause was met or did not apply.
Coinsurance Penalty Calculation
A formula used to determine the amount paid for a partial loss when the insured has not carried the required percentage of insurance to value.
- Formula: (Amount Carried / Amount Required) x Loss Amount.
- Amount Required = Property Value x Coinsurance Percentage.
- Applies to partial losses only.
Memory trick: CAR/AR * LOSS = Payout. Remember the 'CAR' you drive to get paid.