Peter bought the old Whiteacre mansion for $100,000.Due to the fact that it had an antique carved façade and other unique features inside the house, it would cost Peter $120,000 to replace the house if it were destroyed by fire.Peter, however, only insured it for $70,000.A fire from the stove destroyed the kitchen, which incurred an actual loss of $1,000.The cost of replacing the kitchen, however, is $4,000.If he had an 80% coinsurance clause in his homeowner's policy, Peter would receive:

Question

Quizplus · Accepted Answer

Since Peter only insured the house for $70,000, which is less than 80% of the $120,000 replacement cost, he did not meet the coinsurance requirement. Therefore, the amount of reimbursement he will receive for the partial loss will be reduced. To calculate the amount of reimbursement Peter will receive, we use the following formula: amount of insurance carried (divided by) amount of insurance required x amount of loss = reimbursement.

amount of insurance carried / amount of insurance required = ($70,000 / $96,000) = 0.7292
( 80% of $120,000 = $96,000)

reimbursement = (0.7292 x $1,000) = $729.17.

Therefore, Peter will receive less than the full $4,000 loss because his insurance coverage was less than 80% of the full replacement cost of Whiteacre.

Peter Bought the Old Whiteacre Mansion for $100,000