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.

a) Determine compensation Ochieng will receive Step 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 Step 2: Apply the principle of average, as the house is under-insured. The compensation is calculated as: Compensation = ( Amount InsuredActual Value ) × Loss Incurred Step 3: Substitute the values into the formula. Compensation = ( (3,500,000)/(5,000,000) ) × 2,000,000 Step 4: Calculate the compensation. Compensation = ( (35)/(50) ) × 2,000,000 Compensation = 0.7 × 2,000,000 Compensation = 1,400,000 Ochieng will receive: sh. 1,400,000 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. 3 done, 2 left today. You're making progress.