The 80% coinsurance clause in a homeowner's policy would cause a reduction in the claim payment for a covered loss to the dwelling of $30,000 in which of the following cases:
A) dwelling limit of $75,000,replacement cost of dwelling $90,000,actual cash value of dwelling $85,000
B) dwelling limit of $75,000,replacement cost of dwelling $100,000,actual cash value of dwelling $90,000
C) dwelling limit of $90,000,replacement cost of dwelling $90,000,actual cash value of dwelling $90,000
D) dwelling limit of $110,000,replacement cost of dwelling $110,000,actual cash value of dwelling $90,000
E) dwelling limit of $120,000,replacement cost of dwelling $100,000,actual cash value of dwelling $90,000

Question

Quizplus · Accepted Answer

The 80% coinsurance clause requires that the policyholder insure the dwelling for at least 80% of its replacement cost. In case of a covered loss, if the insured's coverage is less than 80% of the replacement cost, the insurer will reduce the claim payment by a proportionate amount.

In choice B, the dwelling limit of $75,000 is less than the replacement cost of $100,000. To comply with the coinsurance requirement, the policyholder should insure the dwelling for at least $80,000 (80% of $100,000). However, the actual coverage is only $75,000, which is 75% of the replacement cost.

To calculate the reduction in claim payment, we use the following formula:

(Insurance carried ÷ Insurance required) × Loss amount = Claim payment

In this case:

($75,000 ÷ $80,000) × $30,000 = $28,125

Therefore, the claim payment would be reduced by $1,875 ($30,000 - $28,125) due to the coinsurance clause.

The 80% Coinsurance Clause in a Homeowner's Policy Would Cause