ABC Company insured its building on a replacement cost basis for $700,000 under a property insurance policy that included an 80 percent coinsurance clause. The building had a replacement cost of $1 million when it sustained a $40,000 loss. How much will ABC Company receive from its insurer, assuming no deductible applies?

amount eligible for payment = $35,000

Explanation:

Given data

Insurance building  = $700,000

insurance Policy = 80%

Sustained cost = $40,000

Replacement cost = $1  million = $1,000,000

solution

we get here first Insurance required that is express as

Insurance required = Cost of building × Co insurance  1

put here value and we get

Insurance required = $1,000,000 × 0.80

Insurance required = $800,000

so amount eligible for payment will be as

amount eligible for payment = (Insurance Carried ÷ Insurance Required) × Loss  2

put here value and we get

amount eligible for payment = $700,000 ÷ ($1,000,000 × 80%) × ($40,000)

amount eligible for payment $700,000 ÷ $800,000 × $40,000

amount eligible for payment = 0.875 × $35,000

amount eligible for payment = $35,000