# 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?

1. \$888,889
2. \$3,111,112
3. \$3,200,000
4. \$3,888,889
5. \$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.