Liquidating damages clause
Losses can be predicted with reasonable accuracy, and this accuracy increases as the size of the group expands.
From a theoretical standpoint, it is possible to eliminate all pure risk if an infinitely large group is selected.
The objects to be insured must be numerous enough and homogeneous enough to allow a reasonably close calculation of the probable frequency and severity of losses.2.
For example, assume that a property is valued at 0,000 new, has depreciated 20 percent in value, insurance of ,000 is taken, and a ,000 loss occurs.
The actual cash value of the loss is ,000 (,000 minus 20 percent depreciation).
The operation of the coinsurance clause would limit recovery to of the loss, or ,500.
However, since the actual cash value of the loss is ,000, this is the amount of the recovery.
At the same time, the potential loss must be severe enough to cause financial hardship if it is not insured against.