Which statement best describes coinsurance in property insurance and the penalty for underinsuring?

Which statement best describes coinsurance in property insurance and the penalty for underinsuring?

• A. The insured must maintain coverage to a specified percentage; if not, payout is reduced proportionally.
• B. The insurer pays the full claim up to the policy limit regardless of coverage percentage.
• C. Coinsurance only applies to liability policies.
• D. Coinsurance increases the deductible automatically.

Answer: (A)

Coinsurance in property insurance requires the insured to carry coverage equal to a specified percentage of the property's value. If the insured falls short of that percentage, the payout is reduced proportionally to the ratio of the actual coverage carried to the required amount. This encourages buying adequate limits and shares the risk when underinsured. For example, if the replacement cost is 200,000 and the coinsurance requirement is 80%, the needed coverage is 160,000. If a loss occurs and the insured only has 100,000, the payout is 100,000 / 160,000 of the loss (a proportional reduction). This isn’t about liability policies, nor does it automatically raise the deductible; the essence is the proportional reduction in payment when the coverage isn’t enough.

Coinsurance in property insurance requires the insured to carry coverage equal to a specified percentage of the property's value. If the insured falls short of that percentage, the payout is reduced proportionally to the ratio of the actual coverage carried to the required amount. This encourages buying adequate limits and shares the risk when underinsured. For example, if the replacement cost is 200,000 and the coinsurance requirement is 80%, the needed coverage is 160,000. If a loss occurs and the insured only has 100,000, the payout is 100,000 / 160,000 of the loss (a proportional reduction). This isn’t about liability policies, nor does it automatically raise the deductible; the essence is the proportional reduction in payment when the coverage isn’t enough.