The named insured is an auto dealer with a single insured location. How much of a covered loss totaling $80,000 will the garage insurer pay if the insured reported $300,000 instead of the actual $400,000?

In this scenario, the correct answer is based on the principle of underinsurance and how it affects the payout in the event of a covered loss. Since the named insured reported a value of $300,000 for their garage coverage instead of the actual value of $400,000, they are considered to have underinsured their business.

Most insurance policies contain a co-insurance clause that requires the insured to maintain coverage of a certain percentage of the value of the property. If the insured's reported coverage is less than the actual value, the payout is reduced accordingly.

In this case, the $300,000 reporting represents 75% of the actual value of $400,000. Therefore, if a loss occurs, the insurer will only indemnify based on the proportion of the coverage compared to the actual value. The loss amount is $80,000, and since the insured has 75% of the coverage necessary, the insurer will cover 75% of the loss.

Calculating this gives 75% of $80,000, which equals $60,000. Thus, the insurer will pay out $60,000 for the covered loss, demonstrating how important it is for businesses to accurately report their values to ensure they are fully covered