The new puzzle store is in a building with a replacement cost of $1,840,000. The building is insured for...

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6. The new puzzle store is in a building with a replacement cost of $1,840,000. The building is insured for $1,200,000, with an 80% coinsurance feature. Determine how much the owners of the store will pay if a fire causes $550,000 in damages to their building. Begin by finding how much of the loss will be paid by the insurance company.

SnapAndSolve AI · Accepted Answer

To determine how much the insurance company will pay, we first calculate the required insurance amount under the coinsurance clause:
Required insurance = 80% of $1,840,000 = $1,472,000.
Since the building is insured for $1,200,000, which is less than the required $1,472,000, the insurance payout is calculated as follows:
Insurance payout = (Amount insured / Required insurance) * Loss
Insurance payout = ($1,200,000 / $1,472,000) * $550,000
Insurance payout = 0.815217 * $550,000 ≈ $448,369.57.
Therefore, the insurance company will pay approximately $448,369.57.
The owners will pay the remaining amount:
Owner's payment = Total loss - Insurance payout
Owner's payment = $550,000 - $448,369.57 ≈ $101,630.43.
Therefore, the owners of the store will pay approximately $101,630.43.

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