A building worth $100,000 is insured for $60,000 under a policy with an 80% co-insurance clause. Fire damages the building to the extent of $20,000…

The co-insurance formula determines the amount the insurer pays when a property is underinsured. The formula is: (Amount of Insurance Carried / Amount of Insurance Required) x Amount of Loss.

First, calculate the required insurance: $100,000 (building value) x 80% (co-insurance) = $80,000.

The insured carried $60,000, which is less than the required $80,000, so a penalty applies.

Apply the formula: ($60,000 / $80,000) x $20,000 = 0.75 x $20,000 = $15,000. The insurer pays $15,000.

B. $18,000 is an incorrect calculation, possibly using a 90% ratio ($60,000/$80,000 $24,000 or similar miscalculation).

C. $16,000 is an incorrect calculation, possibly using an 80% ratio on the loss amount ($20,000 80%).

D. $20,000 would be the full amount paid only if the insured had met the co-insurance requirement by carrying at least $80,000 of insurance.

1. Insurance Institute of Canada. (2016). C11: Principles and Practice of Insurance. Chapter 9, Underwriting and Reinsurance.

2. Insurance Institute of Canada. (2019). C130: Essential Skills for the Insurance Broker and Agent. Module 5, Personal and Commercial Property Insurance Coverages.