An apartment building worth $800,000 is insured for $480,000 with an 80 percent coinsurance clause and a $5,000 deductible. A covered fire causes an $80,000 loss. How much does the insurer pay?
Explanation
Run the coinsurance formula on the loss first, then subtract the deductible. The amount required is 80 percent of $800,000, or $640,000, and $480,000 / $640,000 = 0.75, so 0.75 x $80,000 = $60,000, less the $5,000 deductible = $55,000. Taking the deductible off before applying the ratio gives $56,250 and understates the underinsurance penalty, while $60,000 is the figure of a candidate who stops before the deductible.
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