Question

Donna owns a house with a replacement cost of 500,000 she purchases 300,000 of insurance with a coinsurance requirement of 80% and a 500 deductible. if donna's house is hit by a hurricane and she suffers a 150,000 loss, what will the insurer pay?

A) 74,500
B) 112,000
C) 119,500
D) 149,500

Answer 1

The insurer will pay Donna $112,000 for her $150,000 loss on her house after considering the coinsurance requirement and her $500 deductible.Thus the correct option is B.

Step-by-step explanation:

When calculating the payment from insurance after a loss, one needs to consider the replacement cost of the property, the actual amount of insurance coverage purchased, the coinsurance requirement, and any applicable deductible. Donna's house has a replacement cost of $500,000, and she has insurance coverage of $300,000 with an 80% coinsurance requirement and a $500 deductible. In the event of a $150,000 loss, the insurer's payment can be calculated with the following formula:

Insurance payment = (Amount of insurance purchased / (Replacement cost * Coinsurance requirement)) * Loss - Deductible

However, since Donna's coverage ($300,000) is less than the minimum required ($500,000 * 80% = $400,000), she did not meet the coinsurance requirement, and a penalty is applied proportionally. The insurer pays the proportion of the loss that the policy's amount of insurance bears to the amount required by coinsurance, ending with the deductible being subtracted:

Insurance payment = ($300,000 / $400,000) * $150,000 - $500 deductible = $112,500 - $500 = $112,000.

Therefore, the insurer will pay Donna $112,000 for her loss.