Property & Casualty Insurance Exam (National Portion)Property and Casualty Insurance BasicsHard
A commercial property policy includes a coinsurance clause of 80%. The building has an actual cash value of $500,000, but the insured only carries $300,000 in coverage. If a partial loss of $100,000 occurs, how much will the insurer pay, assuming no deductible?
- A$75,000
- B$80,000
- C$60,000
- D$100,000
Show answer & explanationAnswer & explanation
Correct answer: A. $75,000
The required coverage is 80% of $500,000 = $400,000. The insured carried $300,000. So, the coinsurance penalty applies: ($300,000 / $400,000) * $100,000 = $75,000. The insurer will pay $75,000.
Why the other options are wrong
- B. This represents the 80% coinsurance requirement, not the payout for the partial loss.
- C. This calculation is incorrect for the given figures.
- D. This would be paid if there was no coinsurance penalty or if the property was adequately insured.
Coinsurance Clause (Property)
A property insurance provision that encourages insureds to carry adequate coverage (e.g., 80% of property value). If they fail to do so, they become a coinsurer and must bear a portion of any partial loss.
- Encourages adequate insurance
- Applies to partial losses only
- Penalty for underinsurance
- Calculation: (Amount Carried / Amount Required) * Loss
Memory trick: COINSURANCE: Carried over Required, times the LOSS.