Coinsurance and commercial property valuation on the Texas All-Lines exam

High-yield rules

Practice questions

Written the way the examination builds items. Answer before opening the explanation.

1. Question 1

   A commercial building is valued at $500,000 with an 80 percent coinsurance requirement. The insured carries a $300,000 limit. A partial loss of $100,000 occurs and the deductible is $5,000. What is the amount payable?

   1. A$70,000
   2. B$75,000
   3. C$95,000
   4. D$100,000
   Show answer and reasoning

   Correct answer: A — $70,000

   The required limit is 80 percent of $500,000, or $400,000. The insured carried $300,000, so the ratio is $300,000 divided by $400,000, which is 0.75. Applying that to the $100,000 loss produces $75,000, which is below the $300,000 limit. Subtracting the $5,000 deductible gives $70,000 payable. The $75,000 choice omits the deductible, and $95,000 omits the coinsurance penalty entirely.

2. Question 2

   An insured subject to a coinsurance requirement carries a limit well below the required amount and suffers a partial loss. What is the effect?

   1. AThe claim is denied because the coinsurance condition was breached
   2. BThe insured recovers a reduced, proportionate amount based on the ratio of carried to required limit
   3. CThe insurer must pay the full loss and bill the insured for the shortfall in premium
   4. DThe deductible is waived to offset the penalty
   Show answer and reasoning

   Correct answer: B — The insured recovers a reduced, proportionate amount based on the ratio of carried to required limit

   Coinsurance operates as a proportional reduction rather than a forfeiture. The insured recovers the loss multiplied by the ratio of the limit carried to the limit required. Denial overstates the consequence, retroactive premium billing is not how the provision works, and the deductible still applies.

3. Question 3

   Commercial building and business personal property should be:

   1. AClassified separately under the applicable commercial form
   2. BTreated as personal auto
   3. CIgnored if a BOP exists
   4. DCombined into one unidentified number
   Show answer and reasoning

   Correct answer: A — Classified separately under the applicable commercial form

   Commercial forms distinguish property categories and limits. This original, source-mapped item is provided for concept practice and is not recalled exam content. This explanation connects the selected answer to the controlling fact and is intended for original concept practice, not recalled exam content.

Frequently asked

Does coinsurance apply to total losses the same way?

The provision is most consequential on partial losses, where the proportional reduction changes the payment. Work the arithmetic the fact pattern presents rather than assuming the penalty behaves identically in every scenario.

Is coinsurance the same as a deductible?

No. A deductible is a fixed amount subtracted from a loss. Coinsurance is a proportional reduction triggered by carrying less than the required limit, and both can apply to the same claim.

How do I avoid the coinsurance trap on the exam?

Write out the four inputs before calculating: value, percentage, carried limit, and loss. Computing the required limit as an explicit step prevents the most common error of dividing by the property value.

Key terms on this topic

• CoinsuranceCoinsurance is a property condition requiring the insured to carry a limit equal to a stated percentage of the property’s value, reducing the recoverable amount when the limit carried falls short.
• Commercial propertyCommercial property insurance covers business buildings, business personal property, and related exposures, and typically requires payment for direct physical loss to covered property.
• Policy limitA policy limit is the maximum amount an insurer will pay for a covered loss under a particular coverage, stated on the declarations page.
• DeductibleA deductible is the amount of a covered loss the insured absorbs before the insurer pays, which keeps small claims out of the system and holds premium down.
• Actual cash valueActual cash value is a settlement method that pays the value of damaged property at the time of loss, typically reflecting replacement cost reduced by depreciation.
• Replacement cost valueReplacement cost value is a settlement method that pays the cost to repair or replace damaged property with new property of like kind and quality, without deducting depreciation.

Distinctions worth drilling

• Coinsurance vs. DeductibleBoth coinsurance and deductibles reduce what an insurer pays, which is why candidates confuse them. They operate on entirely different logic and at different points in the calculation.
• ACV vs. RCVActual cash value and replacement cost value are two ways of answering the same question: how much is the insurer obligated to pay for damaged property? They frequently produce different numbers from identical loss facts, which is exactly why the Texas All-Lines exam tests them together.

More in property coverage

• Actual cash value and replacement cost on the Texas All-Lines examHow valuation questions are built, why depreciation is the hinge, and the order of operations that produces the correct settlement figure.
• Policy limits and deductibles on the Texas All-Lines examHow limits cap payment, how deductibles shift the first layer of loss, and why the exam rewards candidates who check which limit actually applies.
• Homeowners policy coverage parts on the Texas All-Lines examHow the exam tests assignment of damaged property to dwelling, other structures, personal property, and loss of use before any valuation happens.
• Covered causes of loss on the Texas All-Lines examHow the exam tests the burden of proof difference between named perils and open perils, and why that difference decides ambiguous-cause questions.
• Property exclusions and water damage on the Texas All-Lines examWhy exclusions remove coverage that the insuring agreement granted, and how the exam uses wind-versus-water fact patterns to test careful causation analysis.
• Business income and extra expense on the Texas All-Lines examHow time-element coverage responds to lost earnings versus the cost of staying open, and why a covered physical loss is the gateway to both.