Expert: Lynn Houston - 4/2/2009

Question
Hello:

Here is a calculation that I saw in a business mathematics textbook regarding insuring a home.

$50,000/$100,000 X $25,000 = $12,500

A. $50,000 is the amount of the insurance policy.
B. $100,000 is the value of the property.
C. $25,000 is the amount from damage caused by fire.

Divide A by B and multiply C by that amount, 0.5 X $25,000 equals the amount the insurance company pays, $12,500.

Can you explain the reason this calculation works? Why divide A by B and then multiply C by the 0.5?

I thank you for any helpful reply that you may offer.


Answer
I know nothing about insurance, but as near as I can figure the reason you multiply by .5 is because they have only insured half the value of the house, so the insurance only pays half the amount of the claim.  If they had a $75,000 policy and the value of the house was $100,000, then the claim would be multiplied by .75 and the insurance company would pay $18,750