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: $367,000
Face Value of Policy: $257,000
Amount of Loss: $2,200

Question

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First, we need to determine the amount paid by the insured out of pocket:

Amount paid by insured = amount of loss x coinsurance percentage 
Amount paid by insured = $2,200 x 20% 
Amount paid by insured = $440

Then, we can calculate the amount paid by the insurance company:

Amount paid by insurance company = face value of policy - amount paid by insured 
Amount paid by insurance company = $257,000 - $440 
Amount paid by insurance company = $256,560

Finally, we round to the nearest dollar:

Amount to be paid by the insurance company ≈ $256,560 ≈ $1,926 First, we need to calculate the amount of insurance coverage as a percentage of the building's replacement cost. We divide the face value of the policy by the replacement cost of the building: $257,000 ÷ $367,000 = 0.7. So the policy provides 70% coverage.

Next, we calculate the amount of the loss that the insured must pay out of pocket. This is the difference between the replacement cost of the building and the amount of insurance coverage: $367,000 − $257,000 = $110,000.

Because the policy includes an 80% coinsurance clause, the insured must insure the building for at least 80% of its replacement cost, or $293,600 (80% of $367,000). And because the insured only has $257,000 of coverage, they are underinsured. Therefore, they will only receive a proportionate amount of the loss from the insurance company.

To calculate the amount to be paid by the insurance company, we use the following formula:

Amount of Loss × (Amount of Insurance ÷ Minimum Required Insurance)

Plugging in the numbers, we get:

$2,200 × ($257,000 ÷ $293,600) = $1,926

Rounding to the nearest dollar, we get the answer D.

Find the Amount to Be Paid by the Insurance Company