Suppose in June You Bought an $80,000 Policy for a Building

question 34

Multiple Choice

Suppose in June you bought an $80,000 policy for a building with an actual cash value of $100,000, and the policy has an 80 percent coinsurance clause, which requires at least 80 percent of the value to be covered in order to receive the actual loss.In December, the actual cash value of the building has increased to $120,000.If the building suffers a $120,000 loss, what amount will the insurer pay?

• A)$ 100,000
• B)$ 120,000
• C)$ 80,000
• D)$ 96,000
• E)$ 90,000

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Definitions:

Premiums

Regular payments made to an insurance company in exchange for coverage, or the additional cost paid for products or services perceived as offering greater value.

Adverse Selection

A scenario in economics where buyers and sellers have access to different information, leading to transactions where the seller is likely to sell goods of lower quality.

Moral Hazard

The risk that a party insulated from risk may behave differently than if they were fully exposed to the risk.

Market Efficiency

Market efficiency refers to the extent to which market prices reflect all available, relevant information, making it impossible to consistently achieve higher returns on investment without taking additional risk.