Carla insures her residence for $300,000 when it is in fact worth $500,000.If the contract contains a 'subject to average' clause and a fire causes $100,000 worth of damage,how much is the insurer obliged to pay?

Question

Quizplus · Accepted Answer

The 'subject to average' clause means that if the insured value is less than the actual value of the property, any claim will be reduced in the same proportion. Here, Carla insured her residence for $300,000 when it's worth $500,000, so she insured 60% of its value. Therefore, for the $100,000 damage, the insurer is obliged to pay 60% of that amount, which is $60,000. However, my initial calculation was incorrect. The correct calculation for the proportion of the claim paid under the 'subject to average' clause is indeed $60,000 worth of the damage (60% of $100,000), which matches option B, not A. My explanation mistakenly supported the wrong conclusion initially.

Carla Insures Her Residence for $300,000 When It Is in Fact