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Calculate Ochieng's compensation and explain the principle applied if his house is insured for sh. 3,500,000 against fire, with an actual value of sh. 5,000,000 and a loss of sh. 2,000,000.

Business/Management

ScanSolve AI Answer

Answer

a

sh. 1,400,000\text{sh. } 1,400,000

Step-by-step solution

4 steps

Part a· 4 steps

Determine compensation Ochieng will receive

  1. Identify the relevant values.

    Actual value of the house = sh. 5,000,000
    Amount insured for = sh. 3,500,000
    Loss incurred due to fire = sh. 2,000,000

  2. Apply the principle of average, as the house is under-insured.

    The compensation is calculated as:

    Compensation=(Amount InsuredActual Value)×Loss Incurred\text{Compensation} = \left( \frac{\text{Amount Insured}}{\text{Actual Value}} \right) \times \text{Loss Incurred}

  3. Substitute the values into the formula.

    Compensation=(3,500,0005,000,000)×2,000,000\text{Compensation} = \left( \frac{3,500,000}{5,000,000} \right) \times 2,000,000

  4. Calculate the compensation.

    Compensation=(3550)×2,000,000\text{Compensation} = \left( \frac{35}{50} \right) \times 2,000,000 Compensation=0.7×2,000,000\text{Compensation} = 0.7 \times 2,000,000 Compensation=1,400,000\text{Compensation} = 1,400,000

    Ochieng will receive:

    sh. 1,400,000\boxed{\text{sh. } 1,400,000}

Part b

State the reason for your answer above

The reason is the principle of average (or average clause), which applies when the property is under-insured. The insurer pays a proportionate amount of the loss based on the ratio of the sum insured to the actual value of the property.

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