A commercial building has a replacement cost of $500,000 and a policy with an 80% coinsurance clause. The insured carries only $300,000 of insurance. After a $100,000 partial loss (ignore deductible), how much will the insurer pay?

Explanation

Required insurance = 80% × $500,000 = $400,000. The insured carries $300,000. Payment = (Carried ÷ Required) × Loss = ($300,000 ÷ $400,000) × $100,000 = 0.75 × $100,000 = $75,000. The coinsurance penalty applies because the insured failed to insure to value, even though the loss is less than the policy limit.