Registered Insurance Brokers of Ontario (RIBO) Practice Exam

If a building worth $250,000 is insured for $50,000 with an 80% co-insurance clause, how much will the insurer pay for fire damage totaling $50,000?

1. $0

2. $12,500

3. $20,000

4. $50,000

The correct answer is: $12,500

To understand how much the insurer will pay in this scenario, it is important to grasp the concept of coinsurance and how it applies to property insurance. In this case, the value of the building is $250,000, and it is insured for $50,000. The co-insurance requirement is set at 80%, which means the policyholder is expected to insure a minimum of 80% of the property’s total value to avoid penalties in the event of a claim. Calculating the minimum required insured amount under the co-insurance clause involves determining 80% of the building's actual value: 80% of $250,000 equals $200,000. Since the building is only insured for $50,000, which is significantly less than the required amount of $200,000, the policyholder has underinsured the property. When there's a claim, the payment by the insurer is reduced based on the ratio of the amount insured to the amount that should have been insured for the claim to be fully honored. In this situation, to find the payout, we use the following formula: (Amount Insured / Required Amount Insured) x Loss = Payout Substituting the values: ($50,000 / $