Question

Aint. of Recovery = Ant. Required Amt. Purchased ​× Loss Bill's house is valued $200,000. He purchased a Homeowners insurance policy which contains an 80% coinsurance clause. His house was damaged in a windstorm and he filed a $10,000 claim. How much will his insurance pay if he purchased a) $160,000 coverage? b) $120,000 coverage?

Answer 1

The insurance payment depends on the coverage purchased and the value of the house, as well as the coinsurance clause.

Step-by-step explanation:

The 80% coinsurance clause means that Bill's insurance policy covers 80% of the cost of the claim. To calculate the amount the insurance will pay, we need to determine the required amount of coverage. The required amount of coverage is calculated by multiplying the value of the house by the coinsurance rate.

a) If Bill purchased $160,000 coverage, the required amount of coverage would be 80% of $200,000, which is $160,000. Since Bill purchased the required amount of coverage, the insurance will pay the full $10,000 claim.

b) If Bill purchased $120,000 coverage, the required amount of coverage would still be 80% of $200,000, which is $160,000. However, since Bill purchased less coverage than required, the insurance will only pay a proportionate amount of the claim. The insurance will pay $10,000 multiplied by the ratio of the actual coverage to the required coverage, which is $120,000/$160,000. Therefore, the insurance will pay $7,500.