What is the purpose of the coinsurance clause in property insurance?

The purpose of the coinsurance clause in property insurance is to encourage policyholders to insure their property to its full value. This clause typically requires that a property be insured for a certain percentage of its total value, often around 80%, 90%, or 100%, depending on the policy.

If the policyholder fails to insure the property to at least the required percentage and a loss occurs, the coinsurance clause will apply and reduce the amount of the claim payment accordingly. This system incentivizes property owners to purchase adequate coverage, ensuring that they are sufficiently protected in the event of significant losses. By doing so, it helps maintain the financial integrity of the insurance system and prevents underinsurance, which could lead to insufficient payouts after a loss.

For example, if a property valued at $100,000 is only insured for $70,000 (70% of its value) when the coinsurance requirement is 80%, in the event of a claim, the payout may be heavily reduced, thus emphasizing the importance of carrying adequate insurance.