Question

William purchased a home three weeks ago for $600,000. He insured his home for $400,000. His home insurance policy includes: • 80% coinsurance clause • 100% guaranteed replacement cost clause. While installing a new washing machine there was an explosion, which resulted in damages of $250,000.

Calculate how much he will be paid from his insurance company using:

      The 80% coinsurance clause?    /3 marks

The 100% guaranteed replacement cost clause? /3 marks

Answer 1

Payment under 80 % coinsurance clauses

Required insurance for the home = Price of home x 80 % = $ 600,000 x 0.8 = $ 480,000

Willam insured for $ 400,000

Pro Rate = Insured amount / required insurance = $ 400,000/$ 480,000 = 0.833333333 or 83.33 %

Willam Claimed $ 250,000 for the loss

He will be paid 83.33 % of the claimed amount.

Recovery amount = 250,000 x 83.33 % = $ 208,325

Willam will be paid $ 208,325 using 80 % coinsurance clauses

Payment under 100 % guaranteed replacement cost clause

Required insurance for the home = $ 600,000 x 100 % = $ 600,000

Pro Rate = Insured amount / required insurance = $ 400,000/$ 600,000

                                                                     = 0.666666667 or 66.67 %

He will be paid 66.67% of the claimed amount.

Recovery amount = 250,000 x 66.67 % = $ 166,675

Willam will be paid $ 166,675 using 100 % guaranteed replacement cost clause.