Property & Casualty Insurance Exam (National Portion)Types of PoliciesHard
A business owner has a Commercial Property Policy with a Building and Personal Property Coverage Form. They suffer a covered loss of $100,000. Their policy has a $500,000 limit, an 80% coinsurance clause, and they only carried $300,000 in coverage. How much will the insurer pay for this loss, assuming no deductible applies?
- A$75,000
- B$100,000
- C$60,000
- D$300,000
Show answer & explanationAnswer & explanation
Correct answer: A. $75,000
The coinsurance penalty applies because the insured did not carry enough coverage. The required coverage was 80% of $500,000 = $400,000. The insured carried $300,000. The payout is (Amount Carried / Amount Required) x Loss = ($300,000 / $400,000) x $100,000 = $75,000. The maximum payout is the policy limit, but in this case, the coinsurance penalty reduces the payout below the limit.
Why the other options are wrong
- B. This would be the payout if the coinsurance clause was met or didn't apply, or if the loss was lower.
- C. This calculation is incorrect and doesn't follow the coinsurance formula.
- D. This is the policy limit, but the coinsurance penalty prevents paying up to this amount for this loss.
Coinsurance Penalty Calculation
The coinsurance clause encourages policyholders to insure property to a certain percentage of its value. If they fall short, a penalty is applied, and the insurer will only pay a proportional share of the loss.
- Formula: (Amount of Insurance Carried / Amount of Insurance Required) x Amount of Loss = Payout.
- Amount Required = (Property Value) x (Coinsurance Percentage).
- The payout will not exceed the policy limit or the amount of loss.
- Common coinsurance percentages are 80% or 90%.
Memory trick: Did you carry enough? If not, you'll share the loss.