Question

Regular Business, Inc. (RBI), obtains a fire insurance policy from Statistical Insurance Company on a $400,000 warehouse. The policy includes an 80-percent coinsurance clause. RBI insures the property for $320,000. In a fire, the warehouse suffers $200,000 in damage. RBI can recover:

a. $200,000.
b. $400,000.
c. $320,000.
d. $80,000.

Answer 1

RBI can recover $80,000.

Step-by-step explanation:

The answer is d. $80,000.

The coinsurance clause in the fire insurance policy states that the insured property must be insured for a certain percentage of its value. In this case, RBI insured the property for only 80% of its value, which is $320,000. However, since the actual damage caused by the fire is $200,000, RBI did not meet the coinsurance requirement.

To determine how much RBI can recover, we can use the formula:

Amount Insurance Carried / Amount Insurance Required × Loss

Plugging in the numbers:

$320,000 / $400,000 × $200,000 = $160,000

Since this amount is less than the actual damage of $200,000, RBI can only recover the actual damage amount minus the deductible. In this case, the deductible is $80,000, so RBI can recover $200,000 - $80,000 = $120,000.