Property & Casualty Insurance Exam (National Portion)Types of PoliciesHard
A commercial building owner has a Commercial Property Policy with a Building and Personal Property Coverage Form. The policy includes a coinsurance clause of 80%. The building has an actual cash value (ACV) of $500,000. However, the owner only purchased $300,000 in coverage. After a fire causes $100,000 in damage, how much will the insurer pay, assuming no deductible?
- A$300,000
- B$75,000
- C$100,000
- D$60,000
Show answer & explanationAnswer & explanation
Correct answer: B. $75,000
The coinsurance formula is: (Amount of Insurance Carried / Amount of Insurance Required) x Loss. Amount Required = ACV x Coinsurance Percentage = $500,000 x 0.80 = $400,000. Amount Carried = $300,000. ( $300,000 / $400,000 ) x $100,000 = 0.75 x $100,000 = $75,000. Since the owner is underinsured, the penalty applies.
Why the other options are wrong
- A. This would be paid if the policy limit was $300,000 and the coinsurance clause was met or didn't apply, and the loss was $300,000 or more.
- C. This would be paid if the coinsurance requirement was met (i.e., $400,000 in coverage) or if the policy was written at agreed value.
- D. This calculation would result from using an incorrect coinsurance percentage or formula (e.g., $300k / $500k * $100k = $60k, which doesn't consider the 80% requirement).
Coinsurance Penalty (Commercial Property)
A provision in property insurance policies where the insured shares in the loss if the amount of insurance carried is less than a specified percentage of the property's value at the time of loss.
- Formula: (Amount Carried / Amount Required) x Loss = Payout.
- Amount Required = (Property Value x Coinsurance %) at time of loss.
- Encourages policyholders to insure property to a reasonable value.
Memory trick: To avoid a 'penalty', make sure 'carried' insurance meets the 'required' amount based on value.