P&CFloridahard
A commercial building has a replacement cost of $1,000,000. The owner insures it for $600,000 on a policy with an 80% coinsurance clause. A fire causes $400,000 in damage. What is the insurer's maximum payment (ignoring any deductible)?
A$400,000 — the policy pays the full loss because it is less than the policy limit
B$320,000 — 80% of the $400,000 loss
C$200,000 — insurer pays only 50% because the owner is 50% self-insured
$300,000 — coinsurance penalty applies because the building is underinsured
Why this is the answer
With an 80% coinsurance clause on a $1,000,000 building, the required insurance is $800,000 (80% × $1,000,000). The owner carried only $600,000, so the coinsurance ratio is $600,000 ÷ $800,000 = 0.75. The formula: Recovery = (Amount Carried ÷ Amount Required) × Loss Amount = 0.75 × $400,000 = $300,000. Because $300,000 is less than the policy limit of $600,000, $300,000 is the payment. The insured effectively self-insures the remaining $100,000. The $320,000 figure simply takes 80% of the loss instead of applying the carried-to-required ratio. See FL Outline §II — coinsurance/insurance-to-value.
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