The property of Al's garage is worth $300,000. Al has a fire insurance policy of $180,000 that contains an 80% coinsurance clause. What will the insurance company pay on a fire that causes $210,000 damage? If Al met the coinsurance requirement, how much would the insurance company have to pay?
To determine the insurance company's payout in the event of a fire that causes $210,000 in damage, we first need to understand how the coinsurance clause works.
The coinsurance clause is a provision in an insurance policy that requires the policyholder (in this case, Al) to carry insurance coverage equal to a certain percentage of the property's value. In this scenario, the coinsurance clause is set at 80%.
Step 1: Calculate the insurance coverage that Al should have based on the coinsurance requirement.
Al's property is worth $300,000, and the coinsurance clause is set at 80%. Therefore, Al should have insurance coverage equal to 80% of $300,000, which is $240,000.
Step 2: Compare the actual coverage (fire insurance policy) with the required coverage.
Al's fire insurance policy provides coverage of $180,000, which is less than the required coverage of $240,000.
Step 3: Determine the insurance company's liability when Al does not meet the coinsurance requirement.
To calculate the insurance company's liability in the case of a loss, we need to use the following formula:
Insurance Payout = (Actual Coverage / Required Coverage) * Loss
In this case, the actual coverage is $180,000, the required coverage is $240,000, and the loss is $210,000.
Insurance Payout = ($180,000 / $240,000) * $210,000
Insurance Payout = 0.75 * $210,000
Insurance Payout = $157,500
Therefore, if Al does not meet the coinsurance requirement, the insurance company will pay $157,500 for the fire damage that caused $210,000.
Now let's calculate the payout if Al did meet the coinsurance requirement:
Step 1: Calculate the insurance coverage that Al should have based on the coinsurance requirement (already calculated above): $240,000.
Step 2: Compare the actual coverage (fire insurance policy) with the required coverage.
In this case, Al's fire insurance policy provides coverage of $180,000, which is less than the required coverage of $240,000.
Step 3: Determine the insurance company's liability when Al meets the coinsurance requirement.
When the policyholder meets the coinsurance requirement, the insurance company is obligated to pay the full amount of the loss, up to the policy limit.
Since the loss is $210,000, and Al's policy limit is $180,000, the insurance company would pay $180,000, which is the maximum limit of the policy, as Al already met the coinsurance requirement.
Therefore, if Al had met the coinsurance requirement by having insurance coverage equal to 80% of the property's value, the insurance company would pay $180,000 for the fire damage that caused $210,000.