Insurance loss business math question!

Question

Daniel owns a warehouse with a replacement cost of $950,000 that is insured for $700,000. Find the amount of the loss paid by the insurance company if a fire causes $450,000 in losses and the policy has an 80% coinsurance feature.

$35,526.32

$414,473.68

$331,579.95

$450,000

Answer 1

The answer would be $414,473.68.

Replacement cost of $950,000 X 80% coinsurance = $760,000 so Daniel would have had to carry $760,000 in order to meet the coinsurance requirement. Since he carried $60,000 less than the coinsurance requirement, he was underinsured and would have to suffer a coinsurance penalty on the $450,000 loss. The penalty is calculated is calculated as follows:

$700,000 over $760,000 = .921052631 times $450,000 = $414,473.68 so the coinsurance penalty would be $35,526.32 (before whatever policy deductible there is is subtracted from the loss payment).

Hope this helps!