The Underinsured Roswell Retail Building
Riverside Retail LLC owns a building in Roswell insured under a commercial property policy with a building limit of $900,000, an 80% coinsurance clause, a $10,000 deductible, and replacement cost valuation. The insurer's latest statement of values shows a replacement cost of $1,500,000. On May 4 a windstorm tore off part of the roof; rain entered and damaged ceilings, insulation, and inventory. The adjuster estimates the building damage at $240,000 replacement cost and the inventory loss at $35,000 actual cash value. The policy also has business income coverage with a 72-hour waiting period; the insured's accountant documents $60,000 in lost income and extra expense for 20 days. The insured did not submit a new statement of values after a 2022 addition and argues the $900,000 limit is the most the policy can pay, so coinsurance should not reduce the loss.
1. Calculate the building loss payment after coinsurance and deductible, showing each step.
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Step 1: required insurance = 80% × $1,500,000 = $1,200,000. Step 2: carried insurance = $900,000. Step 3: coinsurance ratio = $900,000 ÷ $1,200,000 = 0.75. Step 4: covered building loss before deductible = $240,000 × 0.75 = $180,000. Step 5: subtract the $10,000 deductible = $170,000 payable. The $900,000 limit does not rescue the insured: coinsurance is a condition of full recovery, not a cap. If the insured had carried $1,200,000, the payment would have been $240,000 less the deductible, subject to the limit. The adjuster should show the calculation in the payment letter and explain that the 2022 addition should have prompted a statement-of-values update. The inventory loss is separate property damage and may be subject to the same occurrence deductible, depending on policy language; the adjuster should confirm the deductible provision and not double-count.
2. Explain how the business income and inventory losses are treated and what the adjuster should document.
Read the worked answer
Business income: the 72-hour waiting period reduces the 20-day loss period to 17 compensable days, assuming the period of restoration and the waiting period run as stated. At $60,000 ÷ 20 = $3,000 per day, the preliminary business income payment is 17 × $3,000 = $51,000, but the adjuster must separate extra expense from lost income and verify continuing expenses and mitigation. The inventory loss of $35,000 is ACV and should be documented with purchase records, inventory counts, and photos; the deductible issue must be applied consistently. The adjuster should request the accountant's worksheet, lease, payroll records, and mitigation invoices, and should not pay the full $60,000 simply because the accountant states it. The payment letter should show the coinsurance calculation, deductible, business income calculation, and any reserves. This documentation matters because a coinsurance penalty often triggers a complaint or bad-faith allegation; a clear, arithmetic explanation is the best response.