Mandren Inc. has a fire insurance policy from the Blundi Insurance Company with a 90% coinsurance clause based on replacement cost. The replacement cost of the building is $600,000. The face amount of the policy Mandren purchases is $400,000. If a covered loss in the amount of $200,000 occurs, how much will Mandren collect from their insurer

Question

03-03-2022
Business

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Mandren Inc. has a fire insurance policy from the Blundi Insurance Company with a 90% coinsurance clause based on replacement cost. The replacement cost of the building is $600,000. The face amount of the policy Mandren purchases is $400,000. If a covered loss in the amount of $200,000 occurs, how much will Mandren collect from their insurer

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Tundexi Tundexi · Answer 1 · 2022-03-14T11:00:59+01:00

The amount of compensation that Mandren will collect from their insurer will be $133,333.33 because the Face value is less than the Replacement value

What is the rule of Under-insurance?

Generally, the rule of Under-insurance is that the Insurer will never pay more than the extent of subject matter insured.

In this case, the value of subject matter insured (face value) is less than the Replacement value of the property

Given Data

Replacement cost = $600,000.

Face amount of policy = $400,000

Loss amount = $200,000

Loss payable = Face amount/Replacement cost * Loss amount

Loss payable = $400,000 / $600,000 * $200,000

Loss payable = $133,333.3333

Loss payable = $133,333.33.

In conclusion, the amount of compensation that Mandren will collect from their insurer will be $133,333.33 because the Face value is less than the Replacement value.