South Carolina Personal Lines Practice Exam

What is the formula for coinsurance if less than 80% is required?

1. (Loss Amount / Insured Value) * Total Payment

2. (Carried / Required) * Loss Amount = Loss Payment

3. (Insured Amount / Coverage) * Loss Amount

4. (Value Insured / Total Coverage) * Total Loss

The correct answer is: (Carried / Required) * Loss Amount = Loss Payment

The correct formula for coinsurance when less than 80% is required is represented as (Carried / Required) * Loss Amount = Loss Payment. This formula calculates the coinsurance penalty by comparing the amount of insurance that was actually carried (the coverage that the insured purchased) to the required amount of coverage based on the property’s value. In a typical coinsurance clause, insurers require the insured to maintain a certain percentage of coverage relative to the total value of the property to avoid penalties at the time of a loss. When the coverage is less than required, the coinsurance formula adjusts the loss payment proportionally based on how much coverage was carried. For example, if a property is valued at $100,000 and the required coinsurance is 80%, the insured would need to carry at least $80,000 in coverage to avoid penalties. If the insured only carried $60,000, the formula would show that the loss payment would be reduced based on the ratio of the actual coverage to the required coverage. Other options provided do not accurately represent the coinsurance calculation specific to scenarios requiring less than 80% coverage. They might involve different aspects of insurance calculations but do not focus on the necessary ratio of coverage to determine the loss payment due