The property of Lance's Garage is worth $90,000. Lance has a fire insurance policy of $40,000 that contains an 80% coinsurance clause. On a fire that causes $60,000 of damage, the insurance company pays:

Question

Quizplus · Accepted Answer

To determine how much the insurance company will pay out, we must first calculate the minimum amount of insurance coverage Lance should have had, given the 80% coinsurance clause.

Minimum insurance coverage = 80% x Property value = 80% x $90,000 = $72,000

Since Lance only has $40,000 worth of coverage, he is underinsured. Therefore, the insurance company will only cover a proportionate amount of the loss:

Payout = (Insurance coverage / Minimum insurance coverage) x Loss = ($40,000 / $72,000) x $60,000 = $33,333.33

Thus, the insurance company will pay out $33,333.33 to Lance.

The Property of Lance's Garage Is Worth $90,000