Paul purchased a house and also purchased fire insurance coverage on the house. The policy contained an 80 percent coinsurance clause. Paul maintained coverage in the amount of $150,000 and the value of the house was $250,000. A fire caused a loss of $100,000. Paul will collect:

Question

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The coinsurance clause requires the policyholder to carry insurance equal to at least 80 percent of the value of the house. Paul only maintained $150,000 in coverage, which is only 60% of the house's value. Therefore, he is considered to be underinsured and will not receive the full amount of his claim. The amount he will receive is calculated using this formula: Insurance Carried/Insurance Required x Loss = Amount of Claim. So, in this case, $150,000 (insurance carried) / $200,000 (insurance required) x $100,000 (loss) = $75,000. Paul will only receive $75,000 from his insurance policy, leaving him responsible for the remaining $25,000 of the loss.

Paul Purchased a House and Also Purchased Fire Insurance Coverage