Im studying for the property and casualty insurance test and have a question! PLEEEASE help me!?

Question

can someone explain this question and answer to me? I don't understand how they got 4500?!

your insured purchased a builder's risk policy of 50,000 dollars on a building with construction costs of 100,000 dollars, with a 500dollar deductable. how much of a 10,000dollar covered loss will be paid?

the answer they gave was 4500

how is that the answer!!!???

Answer 1

There is normally a co-insurance clause in most property policies.  This co-insurance clause is 100% for sake of simplicity.  That means, in order to be paid 100% of a covered loss less the deductible, the insured must insure for  100% of the construction cost.

The formula is:  what the building was insured for divided by what they should have insured for times the loss minus the deductible.  Easy way to remember:  ("did" divided by "should") x loss amount - ded = payment

50,000/100,000 = 1/2

1/2 x 10,000 = 5,000

5,000 - 500 = 4,500

Many policies have an 80% co-insurance clause.  The formula is the same but the numbers are a little more complicated.

With an 80% co-insurance clause:

50,000/80,000 (only need to insure to 80%) = 5/8

5/8 x 10,000 = 6,250

6,250 - 500 = 5,750

Your actual test may ask the question with an 80% co-insurance clause so I thought I would show you the numbers.  

Both my licensing tests (2 states) included a variation on this question - probably more than one, so know this one...

Answer 2

You are trying too hard, child.

Take a deep breath.  Exhale.

The value of the construction is 100K.

The insured bought only half that amount, 50K.

The 10K loss is a covered loss (meaning the policy does not exclude it).

That covered loss will be reimbursed only to half that amount.  (See the sentences above.)

The 10K loss can only be reimbursed to 5K.

Take away the deductible, and you get the correct answer.

Answer 3

It is looking very typical problem. As i am from India, we don't see this type of cases. But if u look for another, welcome