A warehouse with a $2,000,000 replacement value carries $2,000,000 of coverage subject to a 90% coinsurance clause. A covered loss causes $500,000 of damage. Ignoring the deductible, what amount will the insurer pay?
Explanation
Coinsurance requires the insured to carry at least the required percentage of value. Here, 90% x $2,000,000 = $1,800,000 of required coverage; the insured carries $2,000,000, which exceeds the requirement. Because the coinsurance requirement is satisfied, the insurer pays the full $500,000 covered loss subject only to the limit and the deductible (ignored in the problem). There is no penalty.
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