Dan bought a $500,000 marina two years ago and obtained $400,000 of property insurance. Recently, economic improvements on the lake have raised the property's value to $550,000 (the good news). But the general store had a fire causing $100,000 worth of damage (the bad news). How much will the insurance company pay to repair the store since Dan has a coinsurance clause with a stated percentage of 80 percent in the marina's policy?

Question

What will be an ideal response?

Answer 1

Under the coinsurance clause, Dan agreed to maintain insurance equal to 80 percent of the value of the property at the time of actual loss. When the marina was first purchased, Dan had enough insurance ($500,000 × 80% = $400,000). With the increase in the property's value, 80% of the new value would be $440,000, resulting in Dan becoming a co-insurer of the property. Because the actual insurance is only about 91% of what it should be, Dan will be required to make up a difference in the store claim. The insurance company would pay $90,909, and Dan would be required to pay the difference of $9,091.