Florida 2-20 General Lines Agent (Property, Casualty, Commercial Lines and Florida Law)Property InsuranceMedium
A business owner has a Commercial Property Policy with a Building and Personal Property (BPP) coverage form. Their building sustains $150,000 in damage from a covered peril. The building's actual cash value (ACV) is $800,000, and its replacement cost (RC) is $1,000,000. The policy has an 80% coinsurance clause and the limit of insurance is $700,000. How much will the insurer pay for this loss, assuming no deductible?
- A$131,250
- B$150,000
- C$105,000
- D$175,000
Show answer & explanationAnswer & explanation
Correct answer: A. $131,250
The required insurance is 80% of the replacement cost, which is $1,000,000 * 0.80 = $800,000. The client carried $700,000. The coinsurance penalty is (Amount Carried / Amount Required) * Loss = ($700,000 / $800,000) * $150,000 = $0.875 * $150,000 = $131,250.
Why the other options are wrong
- B. This would be the payment if the coinsurance clause was met or did not apply, which is not the case here.
- C. This calculation is incorrect and does not follow the coinsurance formula.
- D. This calculation is incorrect and overestimates the payment due to the coinsurance penalty.
Coinsurance Penalty
A clause in property insurance requiring the policyholder to maintain a certain percentage of coverage relative to the property's value, or face a penalty in the event of a partial loss.
- Encourages adequate coverage amounts
- Calculated: (Amount Carried / Amount Required) x Loss
- Applies to partial losses when coverage is insufficient
Memory trick: Coinsurance: Carried vs. Required, then multiply by the Loss.