Question

Chapter 6, Review Questions 1 Homework. Unanswered A property insurance policy is written with a 90 percent coinsurance clause and a policy limit of $45,000. The actual replacement cost of the structure, less depreciation, is found to be $100,000. What amount may be collected under this policy in the event of a $50,000 loss? Numeric Answer:

Answer 1

FACTS OF THE CASE

The coinsurance percentage is 90%

The Policy limit is $45,000

The actual replacement cost of the structure less depreciation is $100,000

POLICY LIMIT DOES NOT MEET THE REQUIRED PERCENTAGE

Value of the property x Coinsurance percentage = Minimum insurance amount required

Hence The limit of insurance should be at least $100,000 x 90% = $90,000

However the policy limit is only $ 45,000 i.e. only 50% of the amount required ($45,000/$90,000),

AMOUNT TO BE COLLECTED UNDER POLICY IN CASE OF LOSS

loss is $50,000

Since the Policy limit is only 50% of the amount required, amount that can be collected under insurance policy is only 50% of the loss i.e. $ 50,000 x .50 = $ 25,000