A dwelling with a replacement cost of $500,000 is insured for $300,000 under a policy with an 80% coinsurance clause. A partial loss of $40,000 occurs (ignore the deductible). How much will the insurer pay?

Explanation

80% of the $500,000 RC = $400,000 required. The insured carries $300,000, so the coinsurance fraction is 300/400 = 75%. Payment = 75% × $40,000 = $30,000. The insured absorbs $10,000 as the coinsurance penalty. Coinsurance applies only to PARTIAL losses; a total loss would be paid up to the $300,000 limit.