Henderson owned a concrete block building valued at $20,000. Because it was virtually fireproof, he insured it for only $10,000 under a policy of insurance which contained an 80% coinsurance clause. Some time later, the building was damaged by fire. Under the co-insurance clause, the insurer would only be required to pay 80% of the face amount of the policy if the building was totally destroyed by fire.

Question

Quizplus · Accepted Answer

The co-insurance clause requires the policyholder to carry insurance equal to a specified percentage (in this case, 80%) of the value of the property to receive full compensation for a loss. If the property is underinsured at the time of the loss, the claim payment is reduced. The explanation given misinterprets the function of the co-insurance clause; it does not mean the insurer pays 80% of the policy face amount for total destruction but rather that the claim payment is reduced if the insured amount is less than 80% of the property's value at the time of loss.

Henderson Owned a Concrete Block Building Valued at $20,000