Lee's toy store is worth $400,000 and is insured for $300,000. Assuming an 80% coinsurance clause and a fire that caused $190,000 of damage, the liability of the insurance company is:

Question

Quizplus · Accepted Answer

First, we need to calculate the minimum amount of coverage required by the 80% coinsurance clause:

Minimum Coverage = (80% x $400,000) = $320,000

Since the store is only insured for $300,000, it is underinsured. Therefore, any claim payout will be reduced by a penalty, which is calculated as follows:

Penalty = (Amount of Insurance / Minimum Coverage) x Amount of Loss
Penalty = ($300,000 / $320,000) x $190,000
Penalty = 0.9375 x $190,000
Penalty = $178,125

The actual payout by the insurance company is the amount of loss minus the penalty:

Payout = Amount of Loss - Penalty
Payout = $190,000 - $178,125
Payout = $11,875

Therefore, the liability of the insurance company is $178,125.

Lee's Toy Store Is Worth $400,000 and Is Insured for $300,000