Loss Settlement Amount

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DEFINITION of 'Loss Settlement Amount'

A term used to denote the amount of a homeowner's insurance settlement. Homeowners are typically required to carry insurance that will cover at least 80% of the replacement value of their house. The loss settlement amount, the funds that the insurance company pays out to the homeowner, may be less than the amount of full coverage if the 80% coinsurance requirement is not met.

INVESTOPEDIA EXPLAINS 'Loss Settlement Amount'

The loss settlement formula works like this: If a homeowner with a $400,000 house carries only $300,000 of coverage, and sustains a loss of $150,000 from a fire, then less than the total amount of $150,000 will be reimbursed. The amount to be paid is computed by dividing the amount of insurance carried by the 80% requirement. This comes to $300,000 / $320,000 (80% of $400,000). The quotient is 0.94. Multiply this amount by the loss of $150,000 to get $140,625. This is the amount that will be reimbursed.

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