Principles of Risk Management and Insurance 13th Edition by George Rejda,Michael McNamara

Exercise 3

Stephanie owns a small warehouse that is insured for $200,000 under a commercial property insurance policy. The policy contains an 80 percent coinsurance clause. The warehouse sustained a $50,000 loss because of a fire in a storage area. The replacement cost of the warehouse at the time of loss is $500,000.
a. What is the insurer's liability, if any, for this loss? Show your calculations.
b. Assume that Stephanie carried $500,000 of property insurance on the warehouse at the time of loss. If the amount of loss is $10,000, how much will she collect?
c. Explain the theory or rationale of coinsurance in a property insurance contract.