Registered Insurance Brokers of Ontario (RIBO) Practice Exam

An insured owns a building valued at $200,000 and insures it for $140,000. The building is damaged by fire to an extent of $50,000. How much of the loss will the insurer pay?

1. $50,000

2. $35,000

3. $140,000

4. $200,000

The correct answer is: $35,000

The scenario presented involves a concept known as underinsurance, where an asset is insured for less than its full value. In this case, the building is valued at $200,000 but is insured for only $140,000. When determining how much the insurer will pay in the event of a loss, the principle of actual cash value and the coinsurance requirement come into play. The claim payment can be calculated using the formula: Claim Payment = (Amount Insured / Value of Property) x Loss Amount Here, the loss amount is $50,000, the amount insured is $140,000, and the value of the property is $200,000. Plugging in these values: Claim Payment = ($140,000 / $200,000) x $50,000 Claim Payment = 0.7 x $50,000 Claim Payment = $35,000 Thus, in this situation, the insurer would ultimately pay $35,000 for the loss incurred due to the fire damage to the building. This illustrates the consequences of underinsuring a property—the insured is responsible for part of the loss because the insurance coverage is below the replacement value of the property.