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The Institutes Knowledge Group CPCU-500 Exam - Topic 3 Question 6 Discussion

Courtland Incorporated owns a $1 million office building which it insures under a Building and Personal Property Coverage Form with an 80 percent coinsurance provision. In an effort to reduce the premium, and assuming that it would never have a total loss, Courtland Incorporated decided to insure the building for $600,000. Ignoring any deductible that may apply, how much would the BPP insurer pay if the building suffered a covered loss of $100,000?
B) $75,000
A) $60,000
C) $80,000
D) $100,000

The Institutes Knowledge Group CPCU-500 Exam - Topic 3 Question 6 Discussion

Actual exam question for The Institutes Knowledge Group's CPCU-500 exam
Question #: 6
Topic #: 3
[All CPCU-500 Questions]

Courtland Incorporated owns a $1 million office building which it insures under a Building and Personal Property Coverage Form with an 80 percent coinsurance provision. In an effort to reduce the premium, and assuming that it would never have a total loss, Courtland Incorporated decided to insure the building for $600,000. Ignoring any deductible that may apply, how much would the BPP insurer pay if the building suffered a covered loss of $100,000?

Show Suggested Answer Hide Answer
Suggested Answer: B

CPCU 500 explains that coinsurance is a policy condition designed to encourage insureds to carry insurance close to the property's value. If the insured carries less than the required amount, the insurer applies a coinsurance penalty on partial losses. The required amount of insurance is calculated as:

Property value coinsurance percentage.

Here, the building's value is $1,000,000 and the coinsurance requirement is 80%, so Courtland must carry at least:

$1,000,000 0.80 = $800,000.

Courtland only carried $600,000, which is below the required $800,000. Under the standard coinsurance formula, the insurer's payment (before deductible) is:

(Amount carried Amount required) Loss amount.

So the payment is:

($600,000 $800,000) $100,000

= 0.75 $100,000

= $75,000.

This result illustrates the CPCU 500 concept that underinsuring to save premium can create a significant out-of-pocket cost even on a moderate loss. Courtland would absorb the remaining $25,000 (plus any deductible, if applicable) because it did not meet the coinsurance requirement.


by Heidy at Mar 07, 2026, 06:11 AM

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Delisa
4 days ago
This question is tricky!
upvoted 0 times
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Marge
9 days ago
So they’ll only get a fraction of the loss? That seems unfair!
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Tracey
15 days ago
Totally agree, they should have insured for more to avoid this issue.
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Stefan
20 days ago
Wait, how does that even work? They’ll lose money on the claim!
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Adelaide
25 days ago
They only insured for $600,000, so they’re underinsured.
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Wynell
1 month ago
The coinsurance requirement is 80%, so they need to insure for at least $800,000.
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Lawanda
1 month ago
Totally agree, they should have insured it for more!
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Gerald
1 month ago
Wait, how does underinsuring even work in this case?
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Roy
2 months ago
I think the payout will be less than the loss amount.
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Danica
2 months ago
They underinsured the building, so they won't get full coverage.
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Vicente
2 months ago
The coinsurance requirement is 80%.
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Buddy
2 months ago
Totally agree, $75,000 makes sense with the coinsurance penalty!
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Irma
4 months ago
Wait, how can they think $600k is enough? Seems risky!
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Helaine
4 months ago
I think they’d only get $75,000 from the insurer.
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Martin
4 months ago
They only insured for $600,000, so they’re underinsured.
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Adolph
4 months ago
The coinsurance requirement is 80%, so they need to insure for at least $800,000.
upvoted 0 times
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Emerson
4 months ago
I'm leaning towards $80,000, but I can't quite recall how the coinsurance affects the payout.
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Vince
4 months ago
I practiced a similar question, and I think the formula involves the insured amount versus the actual value.
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An
5 months ago
I think if they insured for less than 80%, they might not get the full amount. Maybe it's $75,000?
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Lenna
5 months ago
I remember something about coinsurance penalties, but I'm not sure how they apply here.
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Barney
5 months ago
I’m leaning towards option B, but I’m not confident about the exact calculation for the coinsurance penalty.
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Keena
5 months ago
This seems similar to a practice question we did where the payout was calculated based on the insured amount versus the actual value.
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Elin
5 months ago
I think if they insured for less than 80% of the value, they might get a reduced payout.
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Cherry
5 months ago
I remember something about coinsurance penalties, but I'm not entirely sure how they apply here.
upvoted 0 times
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