Question

ABC Company insured its building on a replacement cost basis for $700,000 under a property insurance policy that included an 80% coinsurance clause. The building had a replacement cost of $1 million when it sustained a $40,000 loss. How much will ABC Company receive from its insurer, assuming no deductible applies?

Answer 1

$35,000

Step-by-step explanation:

Given that

Insurance = $700,000

Sustained cost = $40,000

Replacement cost = $1,000,000

Policy = 80%

The computation of amount eligible for payment is as shown below:-

Insurance required = Cost of building × Co insurance

=$1,000,000 × 0.80

= $800,000

The amount eligible for payment = (Insurance Carried ÷ Insurance Required) × Loss

= $700,000 ÷ ($1,000,000 × 80%) × ($40,000)

= $700,000 ÷ $800,000 × $40,000

= 0.875 × $35,000

= $35,000