Property & Casualty Insurance Exam (National Portion)Property and Casualty Insurance BasicsMedium
A business owner has a Commercial Property policy with a 80% coinsurance clause. The building is valued at $500,000. To avoid a coinsurance penalty, what minimum amount of insurance must the owner carry?
- A$400,000
- B$300,000
- C$625,000
- D$500,000
Show answer & explanationAnswer & explanation
Correct answer: A. $400,000
To avoid a coinsurance penalty, the insured must carry coverage equal to or greater than the coinsurance percentage multiplied by the property's value. In this case, 80% of $500,000 is $400,000. ($500,000 * 0.80 = $400,000).
Why the other options are wrong
- B. This is 60% of the value, which is less than required.
- C. This is 125% of the value, calculated incorrectly or as if it were a different clause.
- D. This is 100% of the value, which is more than required but avoids penalty.
Coinsurance Clause (Property)
A provision that requires the insured to carry a certain percentage of the property's value in insurance coverage to receive full payment for a partial loss.
- Discourages underinsurance.
- If underinsured, a penalty applies to partial losses.
- Common percentages are 80%, 90%, or 100%.
Memory trick: Coinsurance: 'Co-insure' yourself for the 'Co-rrect' amount.