How is reimbursement calculated in proportionate replacement?

In the context of property insurance, the calculation of reimbursement in proportionate replacement is based on the relationship between the amount of insurance a policyholder carries and the amount of insurance that was required for adequate coverage at the time of the loss.

The correct method to calculate reimbursement in proportionate replacement is derived from the formula considering how much insurance was actually in force compared to how much insurance should have been in place. Specifically, the formula is structured as the ratio of insurance carried to insurance required, multiplied by the amount of loss experienced. This approach ensures that the payout is equitable and reflects the level of coverage that the policyholder had relative to the risk.

This calculation principle addresses the concept of underinsurance, where if a homeowner was supposed to have a higher amount of insurance to cover their property but opted for less, they would not receive a full reimbursement for their loss. By applying the ratio of what is held versus what is needed, the policyholder's recovery aligns with their investment in insurance, fostering fairness in claims processing.