The property on 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 find out how much the insurance company will pay on a fire that causes $210,000 worth of damage, we need to calculate the coinsurance amount.
In this case, the insurance policy has a coinsurance clause of 80%, which means that Al needs to insure his property for at least 80% of the property's value.
Al's property is worth $300,000, so to meet the coinsurance requirement, Al needs to insure his property for:
80% * $300,000 = $240,000
Since Al's fire insurance policy amount is $180,000, which is less than the required amount of $240,000, he did not meet the coinsurance requirement.
To determine the insurance company's payment, we use the following formula:
Insurance Payment = (Insurance Policy Amount / Required Coverage Amount) * Actual Loss
Insurance Policy Amount: $180,000
Required Coverage Amount: $240,000
Actual Loss: $210,000
Insurance Payment = ($180,000 / $240,000) * $210,000
Insurance Payment = 0.75 * $210,000
Insurance Payment = $157,500
Therefore, the insurance company will pay $157,500 on a fire that causes $210,000 damage since Al did not meet the coinsurance requirement.
If Al had met the coinsurance requirement, the insurance company would have to pay the full actual loss amount of $210,000.