If Marlene reduces her homeowners coverage to $40,000 and incurs $12,000 in roof damage, what is the potential settlement assuming a coinsurance penalty?

When a property owner reduces their homeowners coverage, they must also be aware of the coinsurance clause, which is a provision that requires policyholders to insure their property for a certain percentage of its value to avoid penalties during claims. Typically, the coinsurance requirement may be set at 80% or a similar threshold for full coverage.

In this scenario, if Marlene has reduced her homeowners coverage to $40,000 and assuming the full insurable value of her home should be higher (for example, say $100,000 is its full value), to adequately satisfy the coinsurance requirement, she would need to carry at least 80% of that value in coverage, which would be $80,000 in this case.

However, since she only has $40,000 in coverage, she is below the required amount. In such a case, the settlement amount for a claim would be subject to penalties based on the amount of insurance carried compared to the amount required. To calculate the potential penalty, you would assess how much she is underinsured:

1. Determine the required insurance amount (in this case, 80% of the actual value if it's $100,000, which is $80,000).
2. Compare it to what she