If replacement cost is $200,000 and the insured carries $150,000 with a loss of $40,000, what is the coinsurance settlement?

If replacement cost is $200,000 and the insured carries $150,000 with a loss of $40,000, what is the coinsurance settlement?

• A. $30,000
• B. $20,000
• C. $40,000
• D. $0

Answer: (A)

coinsurance aims to ensure you carry enough coverage relative to the property's value. When the amount of insurance carried is less than the replacement cost, the insurer pays a proportion of the loss equal to (amount of insurance carried ÷ replacement cost) times the loss. Here, the replacement cost is 200,000 and the insured carries 150,000, which is 75% of the replacement cost. Apply that ratio to the loss of 40,000: 40,000 × 0.75 = 30,000. So the coinsurance settlement is 30,000. If the insured had carried 80% of the replacement cost (160,000), the full loss of 40,000 would be covered (up to the policy limit). Because the coverage only equals 75% of value, the insurer covers 75% of the loss, and the remaining 25% would be borne by the insured.

coinsurance aims to ensure you carry enough coverage relative to the property's value. When the amount of insurance carried is less than the replacement cost, the insurer pays a proportion of the loss equal to (amount of insurance carried ÷ replacement cost) times the loss.

Here, the replacement cost is 200,000 and the insured carries 150,000, which is 75% of the replacement cost. Apply that ratio to the loss of 40,000: 40,000 × 0.75 = 30,000. So the coinsurance settlement is 30,000.

If the insured had carried 80% of the replacement cost (160,000), the full loss of 40,000 would be covered (up to the policy limit). Because the coverage only equals 75% of value, the insurer covers 75% of the loss, and the remaining 25% would be borne by the insured.