In a businessowners policy, if a building has a replacement cost of $300,000 and the company carries $150,000 of insurance, what happens if a loss occurs?

In a businessowners policy (BOP), the concept of coinsurance is critical in determining the payout after a loss occurs, especially when there is a disparity between the insured amount and the actual replacement cost of the property. In this scenario, the building's replacement cost is $300,000, but the insurance coverage is only $150,000.

If a loss happens, the insurer will apply the coinsurance formula to calculate the claim payout. Coinsurance generally requires that the property be insured for a specified percentage of its value (often 80%, 90%, or 100%) to avoid penalties that result in a reduced recovery after a loss. Since the insured amount is less than the desired coverage (which would be 80%, 90%, or more of the replacement cost), a penalty will likely be applied based on how underinsured the property is.

This means the payout will not simply be the insured amount of $150,000 or the full replacement cost of $300,000, but rather it will be calculated proportionally based on the value of insurance carried compared to the required amount based on the building's replacement cost. Therefore, applying the coinsurance formula serves to properly reflect the insured’s level of contribution towards the potential loss,