Coinsurance, ACV Holdback, and Business Income After a Restaurant Fire
Maria owns a 2,400 sq ft restaurant insured under a commercial property policy with a $900,000 building limit, 80% coinsurance, a $10,000 deductible, and replacement cost coverage. A kitchen fire on March 4 damages the roof structure, electrical panels, and dining room. The public adjuster’s independent repair estimate is $360,000 replacement cost and $210,000 actual cash value. The building’s replacement value at the time of loss is $1,150,000. The policy also includes business income coverage with a 72-hour waiting period and a $250,000 limit. Maria’s monthly net income plus continuing expenses averages $48,000, and repairs are expected to take four months. The insurer pays $210,000 ACV and reserves the rest pending repairs. Maria asks the public adjuster whether the coinsurance penalty applies and whether she should rebuild. The public adjuster must also document business income loss, including payroll, rent, and vendor contracts.
1. Calculate the coinsurance requirement, the coinsurance penalty factor, and the maximum building payment before the deductible on a replacement cost basis. Show each formula and explain whether the insurer’s $210,000 ACV payment is consistent with the policy.
Read the worked answer
Coinsurance requirement = 80% × $1,150,000 = $920,000. Because the $900,000 limit is below the requirement, the penalty factor is $900,000 ÷ $920,000 = 0.97826. The replacement-cost loss is $360,000, so the penalized loss is $360,000 × 0.97826 = $352,173.91. Apply the $10,000 deductible once: $352,173.91 − $10,000 = $342,173.91 maximum building payment on a replacement-cost basis, before the recoverable depreciation holdback.
The $210,000 ACV payment is not consistent with a strict coinsurance calculation: ACV loss $210,000 × 0.97826 = $205,434.78, less $10,000 = $195,434.78. The PA should ask the insurer to show its coinsurance worksheet and explain whether it waived the penalty or applied it only to the holdback. Do not assume the insurer will repeat an inconsistent ACV calculation on the supplement.
2. Explain the difference between the ACV payment and the replacement cost holdback, how the deductible should be applied once, and what documentation the PA should assemble before requesting the holdback.
Read the worked answer
The ACV payment is the first installment; the replacement-cost holdback is released after the insured actually repairs or replaces the damaged property. The deductible should be applied once to the loss, not separately to ACV and holdback. If the insurer already applied the full deductible to the ACV payment, the PA should confirm that the holdback calculation does not deduct it again.
The PA should assemble the signed repair contract or contractor bid, permits, invoices, proof of payment, completion photos, and a final replacement-cost estimate. If Maria decides not to rebuild, she cannot collect the holdback and should be told that in writing. The PA should also check whether the policy requires repair within a set period and whether the coinsurance penalty applies to the holdback; usually the same factor does.
3. Compute an approximate business income loss using the 72-hour waiting period and four-month restoration, and list three records the PA should collect to support payroll and rent.
Read the worked answer
Business income loss is measured by net income plus continuing expenses during the period of restoration, minus the 72-hour waiting period. Four months is about 120 days. $48,000 ÷ 30 = $1,600 per day. 120 − 3 = 117 compensable days; 117 × $1,600 = $187,200, within the $250,000 limit.
The PA should collect: (1) profit-and-loss statements for the prior 12 months and the same months in prior years; (2) payroll registers, leases, utility and vendor contracts, and fixed-expense schedules; (3) reservations, sales receipts, and cancelled events showing lost revenue. The PA should separate continuing payroll for key staff from ordinary payroll, and document extra expense separately. If the restoration actually takes longer, the PA should supplement with contractor schedules and delay letters.