If a builder's risk insurance policy covers 80% of a property's value and the total insured amount is $120,000 on a property worth $200,000, what amount will the insurance company pay for a fire loss of $20,000?

In this scenario, the key aspect to focus on is the principle of co-insurance, which often applies to property insurance policies. The builder's risk policy covers 80% of the property's value, which in this case amounts to $160,000 (80% of the $200,000 property value). However, the total insured amount is only $120,000.

When a loss occurs, the insurance company will pay out based on the ratio of the amount of insurance carried to the amount of insurance that should have been carried according to the co-insurance requirement. Since the full coverage required would be $160,000 but only $120,000 is insured, this creates a situation of underinsurance.

To find out how much the insurance company will cover for the fire loss of $20,000, we calculate it as follows:

1. Determine the ratio of the insured amount to the required amount:

• $120,000 (actual coverage) ÷ $160,000 (required coverage) = 0.75 or 75%.

2. Multiply the loss amount by this ratio:

• $20,000 (loss) × 0.75 (coverage ratio) = $15,000.

Therefore, the insurance