Assume that the physical property of a business is valued at $50,000. The company's commercial property policy contains a coinsurance clause with a stated percentage of 80 percent. The company insures the property for $30,000 (75 percent of the specified minimum). The company incurs a fire loss of $20,000. How much of the loss will the insurance company pay for?
A) $0
B) $15,000
C) $20,000
D) $10,000

Question

Quizplus · Accepted Answer

The first step is to determine if the business complied with the coinsurance clause. The stated percentage is 80%, and 75% of the specified minimum is insured, which means:

(Insured Amount) / (Minimum Amount Required) = (75%) / (80%)

$30,000 / (Minimum Amount Required) = 0.9375

Minimum Amount Required = $32,000

Since the actual value of the property is $50,000, the company did comply with the coinsurance clause.

To determine the insurance payout, we use the following formula:

Insurance Payout = (Amount of Insurance Purchased / Minimum Amount Required) x Actual Loss

Insurance Payout = ($30,000 / $32,000) x $20,000

Insurance Payout = $18,750

However, the payout cannot exceed the actual loss amount, which is $20,000. Therefore, the insurance company will pay $15,000 ($20,000 - $5,000 that the insured is responsible for due to the coinsurance clause).

Assume That the Physical Property of a Business Is Valued