In a policy with a 90% coinsurance clause, a building ACV is $1,000,000, insured limit is $800,000, deductible is $500, and a loss of $100,000 occurs. What is the approximate payout?

In a policy with a 90% coinsurance clause, a building ACV is $1,000,000, insured limit is $800,000, deductible is $500, and a loss of $100,000 occurs. What is the approximate payout?

• A. 88,389
• B. 99,500
• C. 100,000
• D. 80,000

Answer: (A)

Coinsurance penalties reduce the payout when the insured carries less than the amount required under a 90% coinsurance clause. The insurer expects the property to be insured for 90% of its replacement cost. If the actual insurance carried is less, the recovery for a loss is reduced proportionally, and the deductible is then subtracted. Here, the replacement cost is treated as 1,000,000 (the ACV given is used for this calculation), so the amount that should be carried is 0.9 × 1,000,000 = 900,000. The policy limit actually carried is 800,000, giving a ratio of 800,000 / 900,000 = 0.888... Multiply this ratio by the loss of 100,000 to get 88,888.89. Subtract the deductible of 500 to arrive at approximately 88,388.89, i.e., about 88,389. So the approximate payout is 88,389.

Coinsurance penalties reduce the payout when the insured carries less than the amount required under a 90% coinsurance clause. The insurer expects the property to be insured for 90% of its replacement cost. If the actual insurance carried is less, the recovery for a loss is reduced proportionally, and the deductible is then subtracted.

Here, the replacement cost is treated as 1,000,000 (the ACV given is used for this calculation), so the amount that should be carried is 0.9 × 1,000,000 = 900,000. The policy limit actually carried is 800,000, giving a ratio of 800,000 / 900,000 = 0.888... Multiply this ratio by the loss of 100,000 to get 88,888.89. Subtract the deductible of 500 to arrive at approximately 88,388.89, i.e., about 88,389.

So the approximate payout is 88,389.