Florida 2-20 General Lines Agent (Property, Casualty, Commercial Lines and Florida Law)Property InsuranceHard
A client owns a commercial office building with a replacement cost of $1,000,000. Their Commercial Property Policy includes an 80% coinsurance clause. The client insures the building for $600,000. A covered fire causes $100,000 in damage. Assuming no deductible, how much will the policy pay for this loss?
- A$60,000
- B$75,000
- C$100,000
- D$80,000
Show answer & explanationAnswer & explanation
Correct answer: B. $75,000
The required coverage is 80% of $1,000,000, which is $800,000. The client only carried $600,000 in coverage. The coinsurance penalty is calculated as (Amount Carried / Amount Required) * Loss. So, ($600,000 / $800,000) * $100,000 = 0.75 * $100,000 = $75,000.
Why the other options are wrong
- A. This would be the payment if the policy only paid 60% of the loss, which isn't how coinsurance works.
- C. This would be the payment if the coinsurance requirement was met or if there was no coinsurance clause.
- D. This represents 80% of the loss, but the coinsurance calculation is based on the ratio of coverage carried to coverage required, not just a percentage of the loss.
Coinsurance Penalty Calculation
A formula used in property insurance to determine the amount an insurer will pay when the insured fails to maintain the required percentage of coverage relative to the property's value.
- Formula: (Amount of Insurance Carried / Amount of Insurance Required) x Amount of Loss = Amount Paid.
- Amount Required = Property Value x Coinsurance Percentage.
- Applies when the insured is underinsured based on the coinsurance clause.
Memory trick: Carried over Required, then times the Loss.