Named PerilP&C producer exam prep

Conceptin Commercial property

Drill10 items

The coinsurance formula, worked step by step

The coinsurance formula is did carry ÷ should carry × loss − deductible, where should carry is the coinsurance percentage times the property's value at the time of the loss. The payment never exceeds the loss or the limit.

What the clause does

A coinsurance clause, typically 80% on commercial property under CP 00 10 10 12, compares the limit the insured bought with the limit the clause requires. Carry at least the required amount and partial losses are paid in full up to the limit. Carry less and the insured absorbs a share of every partial loss in the same proportion as the shortfall.

Two neighbors use similar arithmetic and are separate rules. The homeowners 80% replacement-cost rule is a loss-settlement condition and is not worded as coinsurance; ACV vs replacement cost walks through it. The businessowners policy has no coinsurance on its limit and applies an 80% insurance-to-value condition only to replacement cost.

Four moves, in this order

  1. Take the value at the time of loss

    Use the value on the date of the loss; the value when the policy began does not enter the formula.

  2. Compute should carry

    Multiply that value by the coinsurance percentage.

  3. Apply did ÷ should to the loss

    A ratio of 1 or more means no penalty: pay the loss, up to the limit.

  4. Subtract the deductible last

    On CP 00 10 the deductible comes off after the penalty, and the result is capped at the limit.

Penalty on a warehouse

WorksheetCoinsurance

Warehouse worth $900,000 at loss, 90% clause, insured for $540,000, $81,000 loss, $2,500 deductible

Value at time of loss
$900,000
Coinsurance
90%
Limit carried
$540,000
Loss
$81,000
Deductible
$2,500
  1. Should carry90% × $900,000$810,000
  2. Did ÷ should$540,000 ÷ $810,0002/3
  3. Share of the loss2/3 × $81,000$54,000
  4. Less the deductible$54,000 − $2,500$51,500

Insurer pays$51,500

The value rose after the policy began

WorksheetCoinsurance

Written at $720,000, worth $850,000 at loss; 80% clause; $612,000 limit; $70,000 loss; $1,500 deductible

Value at inception
$720,000
Value at time of loss
$850,000
Coinsurance
80%
Limit carried
$612,000
Loss
$70,000
Deductible
$1,500
  1. Requirement at inception (not used)80% × $720,000$576,000
  2. Should carry at loss80% × $850,000$680,000
  3. Did ÷ should$612,000 ÷ $680,0000.9
  4. Share of the loss0.9 × $70,000$63,000
  5. Less the deductible$63,000 − $1,500$61,500

Insurer pays$61,500

The insured met the requirement the day the policy began and still took a penalty. An inflation guard endorsement, which raises the limit by an annual percentage, exists for exactly this drift.

Set up did ÷ should, then look

0 of 10 answered · 0 right

For every calculation, write the should-carry figure first, using the value on the date of the loss.

Notes on each optionCommit to an answer first. The notes under the item then open on every option: what rules it in or out, and the one word that splits the runner-up from the key.

  1. Item 01

    Which property policy provision reduces the insurer's payment if the insured fails to carry insurance equal to a stated percentage of the property's value?

    1. AA deductible is a fixed amount the insured bears on every loss, whatever the amount of insurance carried.
    2. BCorrect: the coinsurance clause cuts the payment to 'did over should' when the insured carries less than the stated percentage of value.
    3. CThe pro rata liability clause divides a loss among several policies; it does not penalize underinsurance.
    4. DThe other insurance clause decides how several policies share a loss, not whether one policy is too small.
  2. Item 02

    Which change to a commercial property policy would MOST likely lower the premium rate?

    1. ACorrect: a higher coinsurance percentage earns a lower rate, because the insured promises to carry more insurance relative to value.
    2. BMoving from basic to special causes of loss broadens coverage, so it raises the premium.
    3. CAdding the replacement cost option broadens the valuation, so it raises the premium.
    4. DLowering the percentage does the opposite of what is wanted, because a lower coinsurance percentage raises the rate.
  3. Item 03

    A building worth $500,000 when the policy was written is worth $600,000 at the time of a loss. The policy has an 80% coinsurance clause. How much insurance must the owner carry to avoid a coinsurance penalty?

    1. A$500,000 is the value at inception and is not 80% of anything.
    2. BCorrect: coinsurance is measured at the time of loss, so the requirement is 80% × $600,000 = $480,000.
    3. C$400,000 applies 80% to the value when the policy was written, but the requirement is measured against value at the time of the loss.
    4. D$600,000 is the full current value; an 80% clause requires only 80% of it.
  4. Item 04

    Maria's building has a replacement cost of $400,000 at the time of loss and is insured for $240,000 under a policy with an 80% coinsurance clause and a $1,000 deductible. A fire causes a $50,000 loss. How much will the insurer pay?

    1. A$49,000 just subtracts the deductible and skips the coinsurance penalty.
    2. B$36,750 takes the deductible off before applying the penalty, and the penalty comes first.
    3. CCorrect: required is 80% × $400,000 = $320,000, so $240,000 ÷ $320,000 × $50,000 = $37,500, minus the $1,000 deductible = $36,500.
    4. D$29,000 divides by 100% of the value ($240,000 ÷ $400,000) instead of 80%.
  5. Item 05

    A building worth $300,000 is insured for $270,000 under a policy with an 80% coinsurance clause and a $500 deductible. A covered loss of $20,000 occurs. How much will the insurer pay?

    1. ACorrect: required is 80% × $300,000 = $240,000, the $270,000 carried meets it, so the insurer pays $20,000 − $500 = $19,500.
    2. B$20,000 forgets to subtract the $500 deductible.
    3. C$18,000 divides by the full $300,000 value instead of the 80% requirement.
    4. D$17,550 divides by the full value and also applies the ratio after the deductible.
  6. Item 06

    A fire totally destroys the ABC Candy Factory, worth $500,000 at the time of loss. It was insured for $350,000 under an 80% coinsurance clause. Ignoring the deductible, how much will the insurer pay?

    1. A$306,250 applies the 0.875 ratio to the limit instead of to the loss.
    2. B$500,000 is the building's value, and the insurer never pays more than the limit.
    3. CCorrect: the formula gives $350,000 ÷ $400,000 × $500,000 = $437,500, but payment is capped at the $350,000 limit.
    4. D$437,500 is the formula result before the cap; an insurer never pays more than the limit of insurance.
  7. Item 07

    An owner insured a building for $240,000 when it was worth $300,000, under an 80% coinsurance clause. When a $50,000 loss occurs, the building is worth $400,000. Ignoring any deductible, how much will the insurer pay?

    1. ACorrect: at the time of loss 80% × $400,000 = $320,000 is required, so $240,000 ÷ $320,000 × $50,000 = $37,500.
    2. B$30,000 compares the limit with 100% of the value instead of 80%.
    3. C$40,000 is simply 80% of the loss, which is not how the formula works.
    4. D$50,000 assumes compliance based on the value at inception, but coinsurance uses the value at the time of loss.
  8. Item 08

    Which optional coverage in the commercial property form CP 00 10 suspends the coinsurance condition for a stated period, based on a statement of values?

    1. AReplacement Cost changes the valuation basis but leaves the coinsurance condition in force.
    2. BPeak Season raises the business personal property limit for set dates; it does not touch coinsurance.
    3. CCorrect: Agreed Value suspends the coinsurance condition until the stated expiration date, based on a submitted statement of values.
    4. DInflation Guard automatically raises the limit during the term, but coinsurance still applies.
  9. Item 09

    An agreed value optional coverage in CP 00 10 expires in the middle of the policy term, and the insured does not submit a new statement of values. What happens after that date?

    1. AThe policy stays in force; only the agreed value option ends.
    2. BCorrect: Agreed Value suspends coinsurance only until its expiration date, so for later losses the coinsurance condition applies again.
    3. CAgreed Value runs only to the date shown, not automatically to the end of the policy.
    4. DThe limit does not change; what comes back is the coinsurance condition.
  10. Item 10

    A business has annual net income plus operating expenses of $400,000. Its business income form has 50% coinsurance and a $150,000 limit. A $60,000 business income loss occurs. How much is paid?

    1. A$22,500 divides by the full $400,000 instead of the 50% requirement.
    2. B$48,000 pays 80% of the loss, as if coinsurance were a fixed sharing percentage.
    3. C$60,000 ignores the coinsurance penalty entirely.
    4. DCorrect: required is 50% × $400,000 = $200,000, so $150,000 ÷ $200,000 × $60,000 = $45,000.
Mixed practice test · Timed mock

Edge cases on the clause

What if the insured carries more than the clause requires?

The ratio stops at 1. A $750,000 limit against a $640,000 requirement pays a $35,000 loss in full, less the deductible; carrying extra never pays more than the loss.

Does business income coverage have coinsurance too?

It can. The business income form, CP 00 30, offers coinsurance from 50% to 125% of 12 months of net income plus operating expenses. Alternatives replace it: a maximum period of indemnity of 120 days, a monthly limit of indemnity of 1/3, 1/4 or 1/6, or agreed value.

Can the condition be switched off?

Agreed Value replaces the test with an amount both sides accept, and only until the date the option ends.

Run the formula again

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