(2)     $50,000/$68,000 = 73.5 percent of the loss is payable by the insurer;

(3)     73.5 percent X $50,000 (total amount of the covered loss) = $36,750;

(4)     $36,750 – $250 deductible = $36,500, the portion of the loss at replacement cost paid by the insurer.

(B)     If the building is not replaced:

(1)     the $70,000 actual cash value of the building X 80 percent = $56,000, the amount of insurance needed to satisfy the coinsurance requirement;

(2)     $50,000/$56,000 = 89.3 percent of the loss payable by the insurer;

(3)     89.3 percent X $50,000 (total amount of the covered loss) = $44,650;

(4)     $44,650 – $250 deductible = $44,400, the portion of the loss at ACV paid by the insurer.

In the examples presented, I believe the insured should receive the full limit of insurance minus the deductible because ISO's provision for the total amount of covered loss should refer to the full amount of a loss insured by a covered peril, and not to the limit of insurance provided under the policy.

Illinois Subscriber

The only intended changes in the coinsurance clause under the simplified CP 00 10 form from previous forms were in applying the coinsurance penalty before rather than after the deductible, and—when the property is not replaced—in applying the coinsurance percentage to ACV rather than replacement cost.

While ISO introduced into the text of the simplified form some examples of how the coinsurance clause operates, they did not include an example like the one in your seminar showing a loss in excess of both the limit of insurance and the amount payable after application of the coinsurance penalty.

Step three of the coinsurance provision says, "Multiply the total amount of the covered loss before the application of any deductible by the figure determined in step two." The seminar leader has interpreted "the total amount of the covered loss" to be the limit of insurance—$50,000—producing the anomaly of a $7,900 higher recovery for ACV than for replacement cost.

This is incorrect. The fire loss is a "covered loss" and "the total amount of the covered loss" is $85,000 at replacement cost or $70,000 at ACV. If these numbers are substituted for the $50,000 figure in step three, the result for both examples is $62,500. The $250 deductible is then subtracted from this amount (not from the $50,000 limit of insurance as the subscriber suggests), leaving $62,250. As this is more than the limit of insurance, a fifth step must be added to the computation; apply the lower of the amount payable under step four or the limit of insurance—in this case the $50,000 limit of insurance.

So the insurer should pay the $50,000 limit of insurance for either the replacement or the ACV loss.

The rewording of the coinsurance clause in the 1986 and subsequent ISO building and personal property forms is less precise than the previous wording. With the current wording, it might be reasonable that any loss exceeding the policy's limit is not covered by the policy; therefore, "the total amount of the covered loss" cannot be more than the policy limit. However, a more favorable reading (to which the insured is entitled because it is (a) more favorable and  (b) supported by a lengthy tradition of coinsurance application) is that a "covered loss" is one reached by a covered peril and "the total amount" is just that — the total amount of the loss that is covered by the policy regardless of whether covered in full. ISO's old general property form CF 00 11 shows the intent that the coinsurance clause apply to the amount of the total loss more clearly by saying that the company "shall not be liable for a greater proportion of any loss to the property covered."

The coinsurance clause is designed to invoke the penalty only on partial losses. (However, very large partial losses, such as an $80,000 loss in this example, also may escape the coinsurance penalty.) This intention would be forfeited by applying the coinsurance penalty to the policy limit.