Courtland Incorporated owns a $1 million office building which it insures under a Building and...

CPCU 500 explains thatcoinsuranceis a policy condition designed to encourage insureds to carry insurance close to the property’s value. If the insured carries less than the required amount, the insurer applies acoinsurance penaltyon partial losses. The required amount of insurance is calculated as:

Property value × coinsurance percentage.

Here, the building’s value is$1,000,000and the coinsurance requirement is80%, so Courtland must carry at least:

$1,000,000 × 0.80 =$800,000.

Courtland only carried$600,000, which is below the required $800,000. Under the standard coinsurance formula, the insurer’s payment (before deductible) is:

(Amount carried ÷ Amount required) × Loss amount.

So the payment is:

($600,000 ÷ $800,000) × $100,000

= 0.75 × $100,000

=$75,000.

This result illustrates the CPCU 500 concept that underinsuring to save premium can create a significant out-of-pocket cost even on a moderate loss. Courtland would absorb the remaining$25,000(plus any deductible, if applicable) because it did not meet the coinsurance requirement.