Hawaii Insurance License Practice Exam

In insurance, a co-insurance clause is designed to encourage the policyholder to insure their property for a percentage of its total value. In this case, the building is valued at $100,000 and insured for $80,000 under an 80% co-insurance clause. This means that the owner is required to carry insurance equal to at least 80% of the property's value, which would be $80,000 in this scenario.

When a loss occurs, the insurance payout is determined based on the amount insured relative to the property’s actual value. Since the owner has insured the building for the exact amount required by the co-insurance clause, if a loss of $80,000 occurs, the insurance company will cover that full amount. Thus, the policy would pay out the $80,000 loss in full because the insured value meets the co-insurance requirement.

This demonstrates the principle of indemnity in insurance, where the aim is to restore the insured to the same financial condition they were in before the loss, without allowing for profiting off the insurance. Since no penalties or reductions apply in this situation due to underinsurance, the insured is compensated for the total loss.