Texas General Lines — Property and CasualtyProperty and Casualty Insurance BasicsHard
A client has a commercial property policy with a $1,000 deductible. Their building sustains $10,000 in covered damage. The policy also includes a coinsurance clause requiring 80% coverage. The building's replacement cost is $200,000, but it is only insured for $120,000. How much will the insurer pay for this loss?
- A$7,400
- B$6,500
- C$9,000
- D$10,000
Show answer & explanationAnswer & explanation
Correct answer: A. $7,400
First, calculate the coinsurance penalty: (Amount of Insurance Carried / Amount of Insurance Required) = ($120,000 / ($200,000 * 0.80)) = ($120,000 / $160,000) = 0.75. The insurer will pay 75% of the loss, which is $10,000 * 0.75 = $7,500. After applying the $1,000 deductible, the insurer pays $7,500 - $100 = $7,400.
Why the other options are wrong
- B. This calculation incorrectly applies the coinsurance penalty after the deductible or uses an incorrect coinsurance percentage.
- C. This calculation incorrectly only subtracts the deductible without applying the coinsurance penalty.
- D. This calculation ignores both the coinsurance penalty and the deductible.
Coinsurance Penalty Calculation
A provision that requires the insured to carry a certain percentage of the property's value in insurance. If less is carried, the insured becomes a coinsurer and must bear a portion of the loss.
- Encourages adequate coverage amounts.
- Penalty applies if coverage falls below the required percentage.
- Calculated as (Amount Carried / Amount Required) * Loss - Deductible.
Memory trick: Always Calculate Required First, then the Ratio, then the Payout, then Deduct.