In the event of a $40,000 loss, how much will a policy pay if an insured's building with an actual cash value of $200,000 is insured for $120,000 with an 80% coinsurance clause?

To determine how much a policy will pay in the event of a loss, it's essential to consider the terms of the coinsurance clause, particularly the 80% requirement in this case. The coinsurance clause encourages the insured to insure the property for a certain percentage of its value, which is often set at 80% or more.

First, we need to establish the minimum insurance requirement based on the actual cash value of the building. In this scenario, the actual cash value is $200,000, and with an 80% coinsurance provision, the required minimum insurance coverage would be calculated as follows:

Minimum required coverage = 80% of Actual Cash Value

= 0.80 x $200,000

= $160,000

The insured has coverage of $120,000. Since this amount is less than the required minimum of $160,000, a penalty for underinsurance applies.

Next, we apply the formula for the loss payment under a coinsurance clause:

Loss Payment = (Amount of Insurance Carried / Amount of Insurance Required) x Loss Amount

Plugging in the values:

Amount of Insurance Carried = $120,000

Amount of Insurance Required = $160,000

Loss Amount = $