ABC Company insured its building on a replacement cost basis for $700,000 under a property insurance policy that included an 80 percent coinsurance clause. The building had a replacement cost of $1 million when it sustained a $40,000 loss. How much will ABC Company receive from its insurer, assuming no deductible applies?

Question

Business

Gianni Hill

Today, 09:42

ABC Company insured its building on a replacement cost basis for $700,000 under a property insurance policy that included an 80 percent coinsurance clause. The building had a replacement cost of $1 million when it sustained a $40,000 loss. How much will ABC Company receive from its insurer, assuming no deductible applies?

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Answers (1)

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Gary Barajas · Answer 1

amount eligible for payment = $35,000

Explanation:

Given data

Insurance building = $700,000

insurance Policy = 80%

Sustained cost = $40,000

Replacement cost = $1 million = $1,000,000

solution

we get here first Insurance required that is express as

Insurance required = Cost of building * Co insurance ... 1

put here value and we get

Insurance required = $1,000,000 * 0.80

Insurance required = $800,000

so amount eligible for payment will be as

amount eligible for payment = (Insurance Carried : Insurance Required) * Loss ... 2

put here value and we get

amount eligible for payment = $700,000 : ($1,000,000 * 80%) * ($40,000)

amount eligible for payment $700,000 : $800,000 * $40,000

amount eligible for payment = 0.875 * $35,000

amount eligible for payment = $35,000