If a fire causes a $50,000 loss to a building insured for $300,000 with a value of $500,000 and an 80% co-insurance requirement, how much will the insured absorb?

If a fire causes a $50,000 loss to a building insured for $300,000 with a value of $500,000 and an 80% co-insurance requirement, how much will the insured absorb?

• A. $25,000
• B. $12,500
• C. $10,000
• D. $30,000

Answer: (B)

To calculate how much the insured will absorb in the event of a loss, we need to first understand the co-insurance requirement and its implications. In this scenario, the building is insured for $300,000, but its actual value is $500,000, leading to a co-insurance requirement of 80%. The purpose of co-insurance is to encourage the policyholder to insure their property closer to its actual value, as it is penalized for underinsuring. Here, the policy requires that the insured amount must be at least 80% of the actual value. The minimum required coverage in this case is calculated as follows: Minimum required coverage = 80% of $500,000 = $400,000. Since the building is only insured for $300,000, which is less than the required minimum coverage, we are working with a shortfall. Now, this impacts how losses are settled. When a claim arises, the formula used for determining the payout is as follows: Payout = (Amount of Insurance Carried / Amount of Insurance Required) x Loss Substituting in the figures gives: Payout = ($300,000 / $400,000) x $50,000 = 0.

To calculate how much the insured will absorb in the event of a loss, we need to first understand the co-insurance requirement and its implications.

In this scenario, the building is insured for $300,000, but its actual value is $500,000, leading to a co-insurance requirement of 80%. The purpose of co-insurance is to encourage the policyholder to insure their property closer to its actual value, as it is penalized for underinsuring.

Here, the policy requires that the insured amount must be at least 80% of the actual value. The minimum required coverage in this case is calculated as follows:

Minimum required coverage = 80% of $500,000 = $400,000.

Since the building is only insured for $300,000, which is less than the required minimum coverage, we are working with a shortfall. Now, this impacts how losses are settled.

When a claim arises, the formula used for determining the payout is as follows:

Payout = (Amount of Insurance Carried / Amount of Insurance Required) x Loss

Substituting in the figures gives:

Payout = ($300,000 / $400,000) x $50,000 = 0.