A commercial building has a replacement cost of $1,000,000. The policy carries an 80% coinsurance clause with a $600,000 limit. A covered fire causes $200,000 of damage. After applying coinsurance (ignore the deductible), what is the insurer's payment?

Why this is the answer

The coinsurance formula is (amount carried / amount required) × loss, capped at the policy limit and partial loss amount. Required carrying is 80% of $1,000,000 = $800,000. The insured carried only $600,000, so the ratio is 600/800 = 0.75. Apply 0.75 to the $200,000 loss = $150,000 payable. The insured absorbs the $50,000 coinsurance penalty as a self-insurer of the gap.