What formula is used to calculate a coinsurance settlement?

• A. (amount of insurance carried / amount of insurance required) x loss
• B. (amount of insurance required / amount of insurance carried) x loss
• C. (loss / replacement cost) x insured value
• D. (loss / amount carried) x replacement cost

Answer: (A)

Coinsurance in property insurance means you’re expected to carry a minimum portion of the property’s value to qualify for full payment on a loss. When that minimum isn’t met, the settlement is reduced proportionally by the ratio of the insurance carried to the insurance required, applied to the loss amount. In practice, the payout is computed as: (amount of insurance carried / amount of insurance required) × loss. The “amount of insurance required” is the property’s value times the coinsurance percentage. If the insured does meet the requirement, the loss is paid in full (subject to deductible and policy limits). For example, with a property value of 100,000 and an 80% coinsurance clause, the required coverage is 80,000. If only 60,000 is carried and the loss is 20,000, the payout is (60,000 / 80,000) × 20,000 = 15,000. This demonstrates why the proportional formula is used when coinsurance isn’t fully satisfied.