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Insurance Exam Formula Cheat Sheet

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1. Coinsurance Penalty (Did ÷ Should)

(Amount of Insurance Carried ÷ Amount Required) × Loss = Recovery

The 'Did over Should' formula determines how much the insurer pays when the insured doesn't carry enough coverage. The coinsurance clause (typically 80%) requires the insured to carry at least that percentage of the property's value.

Example

Property value: $500,000. Required (80%): $400,000. Carried: $300,000. Loss: $100,000. Recovery = ($300,000 ÷ $400,000) × $100,000 = $75,000

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Remember: 'Did over Should times the Loss.' If the insured carries at least the required amount, the penalty doesn't apply.

2. Actual Cash Value (ACV)

ACV = Replacement Cost − Depreciation

ACV represents what property is worth at the time of loss, accounting for wear, tear, and age. Depreciation reduces the replacement cost to arrive at fair market value.

Example

Replacement cost of roof: $20,000. Roof is 10 years old with 25-year life = 40% depreciated. ACV = $20,000 − $8,000 = $12,000

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Some policies offer Replacement Cost Value (RCV) coverage which pays without depreciation deduction — a key selling point.

3. Pro Rata Liability (Other Insurance)

Insurer's Share = (Policy Limit ÷ Total of All Limits) × Loss

When multiple policies cover the same loss, each insurer pays its proportionate share based on policy limits.

Example

Insurer A limit: $200,000. Insurer B limit: $300,000. Total: $500,000. Loss: $100,000. Insurer A pays: ($200K ÷ $500K) × $100K = $40,000

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4. Business Income Loss

Net Income + Continuing Expenses − Non-Continuing Expenses = Business Income Loss

Calculates the income a business loses during a covered period of restoration after a property loss.

Example

Monthly net income: $50,000. Continuing expenses: $30,000. Non-continuing: $10,000. Monthly BI loss = $50,000 + $30,000 − $10,000 = $70,000

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