2003 Exam5: Q40 b) Insurance To Value, Anderson

[Graduate]

2003 Exam, Q40 b)

We're to find "Additional Insurance" that would've been required for full indemnification of loss by the insurer.

Policy1: I=46,875
Policy2: I=120,000
Policy3: I=375,000

What I'm doing is that the "Additional Insurance" should be equal to the Difference b/w "Loss amount" and the "Indemnity paid by insurer".Doing this, I get the correct answers for Policies 2 and3, but incorrect answer for policy1 (my answer was 3,125 while the correct is 10,000).

I know the above logic is in-correct, there is probably another condition applicable but I don't know what? What am I missing?

Thanks for your time in advance.

[GA Peach]

What you're trying to solve is this:
(F/cV) * L = 50,000
The reason you set the equation = to $50,000 is b/c you want to know what it'd take to pay the entire loss = $50,000

We know c=80%; V=$200,000; and L=$50,000. Therefore, the formula is:
[F/(80%*$200,000)]=50,000

Solving for F=$160,000

The original Face Amount is $150,000, therefore, the answer is $160,000 - $150,000 = $10,000