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A building worth $100,000 is insured for $60,000 under a policy with a 90% co-insurance clause. Fire damages the building to the extent of $45,000. How much does the insurer pay?
The correct answer is D. $30,000.
A co-insurance clause requires the insured to carry insurance equal to a stated percentage of the property's value. If the insured carries less than that amount, a penalty applies at claim time.
Here, the building value is $100,000 and the co-insurance requirement is 90%. So the amount of insurance that should have been carried is:
$100,000 90% = $90,000
But the insured only carried $60,000. That means the insured did not meet the co-insurance requirement. The loss payment is calculated using the standard formula:
Insurance carried Insurance required Loss
$60,000 $90,000 $45,000 = $30,000
So the insurer pays $30,000, assuming no deductible is mentioned.
Why the others are wrong: A. is the policy limit, not the amount payable. B. would only be paid if the insured had met the co-insurance requirement. C. does not match the correct calculation.
From a RIBO perspective, this is a basic commercial property calculation and a very important broker concept. Brokers must explain that co-insurance exists to encourage proper insurance-to-value. If a client underinsures, they effectively become a co-insurer for part of the loss themselves.