How is the settlement calculated in the coinsurance formula?

The correct calculation of the settlement in a coinsurance scenario involves determining how much of a loss will be covered based on the value of the insurance that is carried compared to what should have been carried. This is articulated in the coinsurance formula, which is expressed as:

Settlement = (Amount Carried / Required Amount) x Loss

In this formula, the "Amount Carried" refers to the actual amount of insurance coverage a policyholder has, while the "Required Amount" reflects the minimum coverage required to meet the terms of the coinsurance clause, usually a percentage of the property value. The "Loss" is the total value of the claim being made.

If a policyholder only carries a portion of the required amount, their settlement for a loss will be reduced proportionately. This reflects the basic principle of coinsurance, which aims to encourage policyholders to insure their property to a sufficient value to minimize underinsurance.

In this context, the other options do not accurately convey how coinsurance calculations work. They either misplace terms or fail to represent the necessary relationship between coverage and loss, making them inappropriate for determining settlement amounts under a coinsurance clause.