A business has a Building and Personal Property (BPP) policy with a limit of $1,000,000 and an 80% coinsurance clause. The building's actual cash value at the time of loss is $1,500,000. A fire causes $200,000 in damage. What amount will the insurer pay for the loss?
Correct
The answer is B: $166,667
Coinsurance compares the insurance carried with the insurance required, which is the coinsurance percentage times the value of the covered property at the time of loss. Required: $1,500,000 x 80% = $1,200,000. Carried: $1,000,000, which is less than required, so the insurer pays only the carried-to-required share of the loss: ($1,000,000 / $1,200,000) x $200,000 = (5/6) x $200,000 = $166,667. Paying the full $200,000 ignores the coinsurance penalty. Paying $150,000 uses 75%, the cap in the Value Reporting Form when the first report is missing, which has nothing to do with coinsurance. Paying $120,000 doesn't follow from any correct step; comparing the limit with the full $1,500,000 value, for example, gives 2/3 x $200,000, about $133,333.
Why not ?
Reviewed in our October 2026 California fact-check.
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The answer is B: $166,667
Coinsurance compares the insurance carried with the insurance required, which is the coinsurance percentage times the value of the covered property at the time of loss. Required: $1,500,000 x 80% = $1,200,000. Carried: $1,000,000, which is less than required, so the insurer pays only the carried-to-required share of the loss: ($1,000,000 / $1,200,000) x $200,000 = (5/6) x $200,000 = $166,667. Paying the full $200,000 ignores the coinsurance penalty. Paying $150,000 uses 75%, the cap in the Value Reporting Form when the first report is missing, which has nothing to do with coinsurance. Paying $120,000 doesn't follow from any correct step; comparing the limit with the full $1,500,000 value, for example, gives 2/3 x $200,000, about $133,333.
Reviewed in our October 2026 California fact-check.