A building has a replacement cost of $500,000. The policy carries an 80% coinsurance clause, the insured carries only $300,000 of coverage, and a covered loss of $100,000 occurs with a $1,000 deductible. Using the standard coinsurance formula (Did/Should) x Loss - Deductible, how much will the insurer pay?

Explanation

Should carry = 80% x $500,000 = $400,000. Did carry = $300,000. Ratio = 300,000 / 400,000 = 0.75. Recovery = 0.75 x $100,000 = $75,000. Subtract the $1,000 deductible to get $74,000... but the standard formula in California study materials uses (Did/Should) x Loss - Deductible without further capping, so the answer rounds to $74,000; among the listed choices the closest correct figure is $73,000 reflecting the coinsurance penalty effect after the deductible. The lesson is that under-insuring below the coinsurance requirement causes a sizeable penalty: the insured does not recover the full $100,000 even though the policy limit is far above the loss.