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% co-insurance clause. Some time later, the building was damaged by fire. If the fire damage was $8,000, the insurer would only be obliged to pay $5,000 of the claim.

Question

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The co-insurance clause requires the policyholder to carry insurance equal to a specified percentage of the value of the property (in this case, 80% of $20,000, which is $16,000) to receive full compensation for a loss. Since Henderson insured the building for only $10,000, less than the required $16,000, he is underinsured. The insurer's payment is calculated by dividing the amount of insurance carried ($10,000) by the amount required ($16,000), then multiplying by the loss ($8,000), resulting in a payment of $5,000.

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