An owner purchases a $100,000 parcel of property but only insures for $60,000. There is a partial loss under the policy of $30,000. Under the coinsurance rules, the title insurance company would be liable for the following claim:

Question

Quizplus · Accepted Answer

Under the coinsurance rule, the owner is required to insure the property for at least 80% of its actual value. In this case, the owner only insured the property for 60% of its value, which makes them liable for a penalty.

To calculate the amount of the penalty, we need to apply the following formula:

[(Amount of Insurance carried) / (Amount of Insurance required)] x Loss = Amount of Recovery

[(60,000) / (80,000)] x 30,000 = 22,500

Therefore, the title insurance company would be liable for:

Loss - Amount of Recovery = 30,000 - 22,500 = $7,500

Since the owner only insured for 60% of the property value, the title insurance company would only be responsible for 60% of the $7,500 claim, which is $4,500. Therefore, the correct answer is C.

An Owner Purchases a $100,000 Parcel of Property but Only