Question

In: Finance

Tom has a homeowner’s policy with a 80% coinsurance clause. The full insurable value of his...

Tom has a homeowner’s policy with a 80% coinsurance clause. The full insurable value of his property is $1,000,000. He is only carrying $400,000 in coverage. A fire in the kitchen breaks out (which is a covered peril) and Tom incurs $200,000 in damages. How much will Tom recover from his insurance policy, ignoring any deductibles?

$200,000

$160,000

$100,000

$40,000

Solutions

Expert Solution

Answer : Correct Option is $100,000

As per coinsurance provision

Given :

Insurable Value of Property = $1,000,000;

Coverage = $4,00,000

Coinsurance = 80%

Amount of damages = $200,000

Amount Insured Should Have = 1,000,000 * 80%

= 800000

But Coverage is $400,000

Therefore Amount that the Tom will recoever from insurance company = (400,000 / 800,000) * 200,000

= 0.50 * 200000

=$ 100,000


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