Question

An apartment house is worth $50,000. It is insured for $30,000, and the policy has an 80% coinsurance clause in it. There is a $20,000 loss. The insurance company will pay:

a. Nothing
b. $12,000
c. $24,000
d. $15,000

Answer 1

Using the coinsurance clause calculation, the insurance company will pay $15,000 toward the $20,000 loss on the apartment house. Therefore, the correct option is D.

Step-by-step explanation:

The question is about an insurance claim calculation, taking into account the co-insurance clause in the policy. Given that the apartment house is worth $50,000, but insured for $30,000, with an 80% coinsurance clause, and the loss being $20,000, we need to use the formula for calculating the insurance payment under a coinsurance clause:

Insurance Payment = (Amount of Insurance Purchased / (Value of Property × Coinsurance Percentage)) × Loss

In this case:
Amount of Insurance Purchased = $30,000

Coinsurance Percentage = 80%

Loss = $20,000

First, calculate the minimum required insurance to meet the coinsurance requirement:

Minimum Required Insurance = Value of Property × Coinsurance Percentage = $50,000 × 80% = $40,000

Now, apply the formula:

Insurance Payment = ($30,000 / $40,000) × $20,000 = 0.75 × $20,000 = $15,000

Therefore, the insurance company will pay $15,000 toward the loss.