If a building worth $125,000 is insured for $90,000 with an 80% coinsurance clause and a loss occurs, what will be the recovery under the policy for a $50,000 loss?

To determine the recovery under the policy when a loss occurs, it's essential to understand how the coinsurance clause works. In this scenario, the building is worth $125,000 but is only insured for $90,000, which is less than the full value. The coinsurance clause requires that the property be insured for at least a specified percentage of its value—in this case, 80%.

First, we compute the minimum required insurance amount under the coinsurance clause. This amount is 80% of the building's value, which equals:

[

0.80 \times 125,000 = 100,000

]

Since the building is insured for $90,000, it falls below the required amount of $100,000. This means a penalty will be applied when calculating the loss recovery.

When a loss occurs, the insurer will use the following formula to determine the amount they will pay:

[

\text{Recovery} = \text{Loss} \times \left( \frac{\text{Amount of Insurance}}{\text{Minimum Required Insurance}} \right)

]

Plugging in the numbers:

• Loss = $50,000

• Amount of Insurance = $90,000