Smith owned a concrete block building valued at $200,000.Because it was virtually fireproof,he insured it for only $100,000 under a policy of insurance,which contained an 80 percent co-insurance clause.Some time later,the building was damaged by fire.
-If the fire damage was $80,000,the insurer would be obliged to pay only one-half of the loss,because Smith had insured the building for half of its value.

Question

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The insurer would not be obliged to pay only half of the loss. Instead, the amount the insurer would pay would depend on the formula used to calculate co-insurance. In this case, with an 80 percent co-insurance clause, Smith would need to have insured the building for at least $160,000 (80% of its value) to receive full coverage for the $80,000 loss. Since he only insured it for $100,000, he would only receive a proportionate amount of coverage based on how much he was underinsured. The formula would be: (insurance carried / insurance required) x loss = amount payable. So, in this case, the amount payable would be ($100,000 / $160,000) x $80,000 = $50,000.

Smith Owned a Concrete Block Building Valued at $200,000