Question

An insured owns a $200,000 home and insures it for $100,000. If the insured's home was completely destroyed by a fire, how much money would the insurance company pay if the insured has a policy that requires a minimum of 80% coverage

A) $200,000
B) $150,000
C) $100,000
D) $80,000

Answer 1

The insurance company would pay $100,000 to the insured since the policy covered that amount, and the homeowner was underinsured according to the minimum coverage requirement of 80%.

Step-by-step explanation:

If the insured owns a $200,000 home and insures it for $100,000, but has a policy that requires a minimum of 80% coverage, the insurance payout will be based on the coinsurance formula. The policyholder should have insured the home for at least 80% of its value, which is $160,000 (0.80 x $200,000). Since they only insured it for $100,000, they are underinsured.

The coinsurance formula is:

(Amount of Insurance Purchased / Amount of Insurance Required) x Loss

= Payout

Using this formula, we get:

($100,000 / $160,000) x $200,000 = $125,000

However, since the policy only covers up to the insured amount of $100,000, the insurance company would pay the lesser amount, which is option C) $100,000.