In the event of a partial loss of $10,000, what formula is used to calculate the insurer's payout?

The correct method to calculate the insurer's payout in the event of a partial loss involves understanding the coinsurance principle. When a policy includes a coinsurance clause, it requires the policyholder to maintain a certain level of insurance relative to the property's value. If the insured fails to meet this requirement and suffers a loss, the payout may be reduced to reflect that shortfall, resulting in a coinsurance penalty.

In this scenario, option C states that the payout is based on 50% of the loss, reflecting the application of a coinsurance penalty. This means that the policyholder's failure to adhere to the required level of coverage directly affects the compensation they receive for their loss.

The coinsurance penalty serves as a means to encourage policyholders to insure their property to a percentage of its value. If the loss occurs and the coverage is deemed insufficient, the payout is reduced proportionately according to the coverage carried versus the coverage required. Thus, in a situation where a 50% loss based on the coinsurance penalty is appropriate, this formula correctly reflects the payout calculation.

This understanding is crucial in insurance practices as it emphasizes the importance of maintaining adequate coverage and the potential financial implications of failing to do so.