Understanding Coinsurance: How It Affects Your Insurance Payout

A building valued at $100,000 is insured for $60,000 with an 80% coinsurance clause. After a $90,000 fire loss, how much will the insurer pay?

• A. $90,000
• B. $67,500
• C. $60,000
• D. $72,000

Answer: (B)

To determine how much the insurer will pay after a fire loss, it's essential to understand the effect of the coinsurance clause. In this case, the building valued at $100,000 has an 80% coinsurance requirement. This means that to fully insure the property according to the requirement, the owner should carry insurance of at least 80% of the value, which calculates to $80,000 (80% of $100,000). However, the building is insured for only $60,000, which is below the required amount. In the event of a loss, the insurer applies a formula to calculate the payment based on the actual insurance carried versus the required amount. The formula used is: Insured Amount / Required Amount x Loss Amount By applying this formula: - Insured Amount = $60,000 - Required Amount = $80,000 - Loss Amount = $90,000 First, calculate the ratio: $60,000 / $80,000 = 0.75 Next, multiply this ratio by the loss amount: 0.75 x $90,000 = $67,500 This means that the insurer will pay only $67,500, given the lower insurance carried than

When it comes to insurance, understanding clauses like coinsurance can feel a bit like learning a new language. Ever wonder what that all means? Let’s break it down with a real-life scenario that’ll help you get a handle on how it all works—especially when preparing for the Registered Insurance Brokers of Ontario (RIBO) exam. Grab a notebook because we’re diving into the guts of an insurance calculation!

Let’s set the stage: we have a building valued at a crisp $100,000, and the policyholder has insured it for just $60,000 with an 80% coinsurance clause. Okay, what's the big deal, you might ask? Well, if there’s a loss—like a fire that causes $90,000 worth of damage—calculating the insurer’s payout gets a tad tricky. Here’s the thing: the coinsurance clause isn’t just a fancy term; it affects how much money ends up in the policyholder’s pocket.

So, what exactly is this coinsurance clause? In simple terms, it’s a rule that states you need to have your property insured for a set percentage of its actual value to be in line for the full payout in the event of a loss. Our scenario tells us that the building should be insured for at least 80% of its value—because that’s how coinsurance works.

With a $100,000 building, you’d expect it to be insured for at least $80,000 (that’s 80% of the actual value). But wait! It’s only insured for $60,000. That’s below what’s required! You can almost hear the groans from insurance agents everywhere. Because of this, the policyholder is in a bit of a pickle and is subject to a coinsurance penalty. It’s like not having enough ticket money for the concert—you can’t get the good seat if you haven’t paid enough, right?

Now, let’s do some math. The insurer will calculate the payout using this formula:

[

\text{Amount paid} = \left(\frac{\text{Insured amount}}{\text{Required amount}}\right) \times \text{Loss amount}

]

Let’s plug in the numbers:

• Insured amount: $60,000

• Required amount: $80,000

• Loss amount: $90,000

Now, crunch those numbers:

[

\text{Amount paid} = \left(\frac{60,000}{80,000}\right) \times 90,000

]

[

\text{Amount paid} = 0.75 \times 90,000

]

[

\text{Amount paid} = 67,500

]

Oh wait, hold the phone! Does this mean the insurer pays out $67,500? Not quite. Because the insured amount is below the required amount, the payout is limited to the actual insured value. Remember, the building was insured for only $60,000? In this scenario, it caps the payout at that figure, giving us the final answer of $60,000.

So there we have it, folks—the insurer pays out $60,000 after applying that coinsurance penalty! It’s an important lesson that stresses the significance of adequately insuring property; short-changing your coverage can really bite when you need it most. Make sure you understand these calculations well; they’re bound to come up as you prepare for your RIBO exam! Can you see how clarity in this realm of insurance helps you protect your interests better?

In summary, always pay attention to the details when dealing with insurance policies. Coinsurance clauses might just be the fine print that saves you from financial headaches later. Stay sharp and well-prepared—you got this!