Root & Branch Lumber Company obtains a fire insurance policy from Security Insurance, Inc., on a $400,000 warehouse. The policy includes an 80-percent coinsurance clause. Root & Branch insures the property for $320,000. In a fire, the warehouse suffers $200,000 in damage. Root & Branch can recover

Question

Quizplus · Accepted Answer

Root & Branch insured the property for $320,000, which is less than the required 80% of the $400,000 value, so they did not meet the coinsurance requirement. Therefore, Root & Branch is liable for a portion of the loss in proportion to the amount of underinsurance.

Calculation:

Coverage actually carried / Coverage required = Insurance carried ÷ (Value of the property x coinsurance percentage)

Coverage actually carried / Coverage required = $320,000 / ($400,000 x 0.8) = 1

This means the actual coverage carried is equal to the coverage required.

The insurer will pay out:

The amount of the loss x (Coverage actually carried / Coverage required)

= $200,000 x (1)

= $200,000

Therefore, Root & Branch can recover $200,000.

Root & Branch Lumber Company Obtains a Fire Insurance Policy