Find the amount to be paid by the insurance company. Assume the policy includes an 80% coinsurance clause. Round to the nearest dollar.
-Replacement Cost of Building: $982,000 Face Value of Policy: $589,200
Amount of Loss: $197,000

Question

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First, we need to determine how much the insurance company will cover using the coinsurance clause. The coinsurance clause states that the insurance company will pay for 80% of the loss if the policyholder insures the property for at least 80% of its replacement cost.

To calculate the amount the policyholder should have insured the property for, we use the following formula:

(Insurance amount / Replacement cost) x 100%

In this case, the policyholder should have insured the property for at least:

($589,200 / $982,000) x 100% = 60%

Since the policyholder only insured the property for 60% of its replacement cost, the insurance payout will be subject to the coinsurance penalty.

To determine the amount the insurance company will pay, we use the following formula:

Amount of loss x (Insurance amount / Replacement cost) x Coinsurance percentage

Plugging in the numbers:

$197,000 x ($589,200 / $982,000) x 80% = $117,546.76

Rounding to the nearest dollar: $117,547

Therefore, the amount to be paid by the insurance company is $117,547, which is closest to option C. The 80% coinsurance clause means that the insurance company will pay 80% of the amount of loss that is covered by the policy. In this case, the amount of loss is $197,000 and the face value of the policy is $589,200. The policyholder has insurance coverage for 589,200/982,000 = 0.5990 = 59.9% of the replacement cost of the building.
Since the policyholder is covering less than the required 80% of the replacement cost of the building, a penalty applies: the insurer only pays out [(59.9% / 80%) * $197,000] = $147,750.00 to the policy holder.

Find the Amount to Be Paid by the Insurance Company