Commercial Property Insurance policies typically contain a coinsurance provision. A coinsurance provision requires the insured to insure the covered property to some specified percentage of its full valuetypically 80, 90, or 100 percent. If at the time of loss it is determined that the limits purchased are less than those required by the coinsurance clause, the loss recovery will be limited to that same percentage of loss as the ratio of the insurance amount carried to the insurance amount required.

Suppose that a given building has a replacement cost value of $1 million and is insured under a property policy with a 90 percent coinsurance clause. Suppose further that the insured chose to insure the building for only $800,000 instead of the required $900,000. Subsequently, there is a $100,000 fire loss.

Assume there is no deductible applicable to this loss. Outline how the $100,000 fire loss will be settled given the above information and the impact of the 90 percent co-insurance factor that applies under the policy. Be sure to show your calculations: