Calculating Required Insurance
Course: Insurance Planning
Lesson 6: Commercial Property and Liability Insurance
Student Question:
Would you please help me understand where the 97.2% insured calculation is coming from on review question #2 below? The answer states the the building is 97.2% insured and I am having trouble understanding how that was calculated.
Peter purchased an apartment building for $15,000,000 five years ago. The apartments were appraised a few months ago for $19,500,000 (market value). The building has depreciated by $2,250,000. Peter has the apartment building insured for $14,000,000 on a replacement cost basis. The replacement cost is currently estimated at $18,000,000. The insurer requires 80% coverage for full replacement cost coverage. Recently, a fire damaged the top floor of the building and water damage to the next two floors. It will cost $4,000,000 to restore the building to its former condition. How much of the $4,000,000 replacement cost will the insurer pay?
- $888,889
- $3,111,112
- $3,200,000
- $3,888,889
- $4,000,000
Answer: $3,888,889 The cost, current value, and depreciation are not relevant. The building is insured for 97.2% of the required amount, thus the policy will pay 97.2% of the loss.
Instructor Response:
These can always be confusing.
The main numbers we need to start with are the replacement value ($18million) and required insurance (80%). That will give us the required dollar amount of insurance. 80% of $18million is $14.4 million.
Now we look at how much the building is actually insured for. The question tells us $14million. We then do $14million divided by $14.4million, which is 97.2%.
Let me know if that helps or if you have any additional questions here.
