A commercial building has a replacement cost of $500,000. The owner insures it for $300,000 with an 80% coinsurance clause. A covered fire causes $120,000 in damage. How much will the insurer pay (ignoring deductible)?

Why this is the answer

Step 1: Required insurance = $500,000 x 80% = $400,000. Step 2: Coinsurance ratio = Carried / Required = $300,000 / $400,000 = 0.75. Step 3: Payment = 0.75 x $120,000 = $90,000. The insured bears the remaining $30,000 as a coinsurance penalty. Option B ($96,000) is a trap using 80% of $120,000 directly. Option C assumes full payment; option D is the policy limit.