Question

An apartment house is worth $500,000. The owner insures it for $300,000; the policy has an 80% co-insurance clause. There is a $200,000 loss. The insurer will pay:

Option 1: $160,000
Option 2: $180,000
Option 3: $200,000
Option 4: $240,000

Answer 1

The insurer will pay $150,000 for the $200,000 loss in this scenario.

Step-by-step explanation:

In this scenario, the apartment house is insured for $300,000, but its actual worth is $500,000. The policy has an 80% co-insurance clause, which means that the owner must insure the property for at least 80% of its value. Since the insured amount is less than 80% of the property's worth, it is considered underinsured.

To calculate the amount the insurer will pay for the $200,000 loss, we can use the co-insurance formula. The formula is: Amount paid by insurer = (Amount of insurance carried / Amount required) x Loss incurred.

In this case, the amount of insurance carried is $300,000 and the amount required is 80% of $500,000, which is $400,000. Plugging these values into the formula, we get: Amount paid by insurer = ($300,000 / $400,000) x $200,000 = $150,000.

Therefore, option 1: $160,000 is the closest to the amount the insurer will pay.