Then, in accordance with the provisions of the coinsurance clause,
| L = | A | × B or | AB |
| .8C | .8C |
Three applications of the formula will be illustrated. In the first, both the face of the policy and the amount of loss are less than 80% of the cash value of the property. In the second, the policy carries 80% of the value of the property but the loss is less than 80% of the property value. In the third, while the face of the policy is less than 80%, the loss is more than 80% of the property value. From the formula, it is evident that where A is 80% of C, the formula reduces to B; and where B is 80% of C, it reduces to A. It must be borne in mind, however, that the insurance company is never liable for more than the amount insured, i.e., the face of the policy, nor for more than the amount of the loss.
| Face of Policy “A” | Cash Value of Property “C” | Amount of Loss “B” | Liability of Insurance Company “L” | |
|---|---|---|---|---|
| (1) | $3,000 | $5,000 | $2,500 | $1,875 |
| (2) | 4,000 | 5,000 | 2,500 | 2,500 |
| (3) | 3,000 | 5,000 | 5,000 | 3,000 |
Applying the formula in:
| (1) | AB | = | 3,000 × 2,500 | = 1,875 |
| .8C | .8 of 5,000 | |||
| (2) | AB | = | 4,000 × 2,500 | = 2,500 |
| .8C | .8 of 5,000 | |||
| (3) | AB | = | 3,000 × 5,000 | = 3,750 |
| .8C | .8 of 5,000 | |||
It will be noted in (3) that, inasmuch as the policy is $3,000, only $3,000 can be collected.
When the amount of the liability has been determined, the insurance company has three options:
1. Payment may be made in cash within 60 days after the completion of the proof of loss.
2. It may rebuild or replace the property. Notice of such intention must be given within 30 days from the filing of proof.