Calculate the amount to be paid (in $) by the insurance company for the claim. (Round your answer to the nearest cent.)
| Replacement Value of Building | Face Value of Policy | Coinsurance Clause (%) | Amount of Loss | Amount of Loss Insurance Company will Pay |
|---|---|---|---|---|
| $370,000 | $300,000 | 90 | $135,000 | $ [] |
Answer (2)
The insurance company will pay approximately $121,621.62 for the claim after considering the coinsurance penalty for being underinsured. This was calculated based on the required coverage of the property and the actual loss incurred. The calculations involved determining the coinsurance penalty due to the policy being below the required coverage level.
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Calculate the required insurance coverage: $370,000 \times 0.90 = $333,000.
Determine the coinsurance penalty since the actual coverage ($300,000) is less than the required coverage: $300,000 / $333,000 = 0.9009009009.
Calculate the amount the insurance company pays: $0.9009009009 \times $135,000 = $121,621.62162.
Round the amount to the nearest cent: $121 , 621.62 .
Explanation
Understanding the Problem We are given the replacement value of a building, the face value of the insurance policy, the coinsurance clause, and the amount of loss. We need to calculate the amount the insurance company will pay for the claim.
Calculate Required Coverage First, we need to calculate the required insurance coverage based on the coinsurance clause. The required coverage is 90% of the replacement value of the building.
Calculating Required Coverage Required Coverage = Replacement Value of Building × Coinsurance Clause Required Coverage = $370,000 × 0.90 = $333,000
Comparing Actual and Required Coverage Next, we compare the face value of the policy (actual coverage) with the required coverage.
Determining Coinsurance Penalty Actual Coverage = Face Value of Policy = $300,000 Since $300,000 < $333,000, the actual coverage is less than the required coverage. This means the insurance company will apply a coinsurance penalty.
Calculating Coinsurance Penalty Now, we calculate the coinsurance penalty.
Calculating the Penalty Coinsurance Penalty = Actual Coverage / Required Coverage Coinsurance Penalty = $300,000 / $333,000 = 0.9009009009
Calculating Insurance Payment We calculate the amount the insurance company will pay by multiplying the coinsurance penalty by the amount of loss.
Calculating the Payment Insurance Company Pays = Coinsurance Penalty × Amount of Loss Insurance Company Pays = 0.9009009009 × $135,000 = $121,621.62162
Rounding to Nearest Cent Finally, we round the amount to the nearest cent.
Final Answer Insurance Company Pays = $121,621.62
Examples
Insurance policies and coinsurance clauses are used in various real-life scenarios, such as property insurance, health insurance, and business insurance. For example, a homeowner might have a coinsurance clause in their homeowner's insurance policy. If the homeowner doesn't insure their home for at least the percentage stated in the coinsurance clause, they may not receive full compensation for their losses. Understanding coinsurance helps individuals and businesses make informed decisions about their insurance coverage and potential financial risks.
