If a building valued at $125,000 has insurance coverage of $100,000 and a loss of $20,000 occurs, what will be the recovery under the policy?

To determine the recovery under the insurance policy in this scenario, we need to consider the actual cash value and how underinsurance affects the payout. The building is valued at $125,000 but only covered for $100,000. This is an important factor known as the valuation rule or coinsurance requirement, which often states that to fully collect on a claim, the insured needs to have a certain percentage of the property's value covered by insurance.

Here, with the property valued at $125,000 and only $100,000 covered, the insurance coverage is clearly under the recommended amount, leading to a scenario known as underinsurance.

In the event of a loss, the insurer typically uses the formula:

(Insurance coverage / Actual value) x Loss = Payout

Plugging in the numbers for this situation, we see:

• Insurance coverage = $100,000

• Actual value = $125,000

• Loss = $20,000

Using the formula:

($100,000 / $125,000) x $20,000 = 0.8 x $20,000 = $16,000

However, since the coverage is lower than the actual value, the payout does not exceed the value of the insured loss