Root & Branch Lumber Company obtains a fire insurance policy from Statistical Insurers,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

The 80-percent coinsurance clause means that Root & Branch must insure the property for at least 80 percent of its full value, which in this case is $400,000. However, they only insured it for $320,000, which is 80 percent of $400,000. This means that they have not met the coinsurance requirement and will only be able to recover the proportion of the loss that is equal to the ratio of the amount they did insure to the amount they should have insured. So, the amount they can recover is:

($320,000/$400,000) x $200,000 = $160,000

Therefore, the best choice is C, as they can only recover the amount of the loss that corresponds with their under-insurance of the property.

Root & Branch Lumber Company Obtains a Fire Insurance Policy