What is the primary purpose of a coinsurance clause in a property policy?

What is the primary purpose of a coinsurance clause in a property policy?

• A. To encourage the insured to carry adequate coverage to meet the coinsurance percentage
• B. To increase premiums
• C. To limit coverage to listed insureds
• D. To reduce the insured's deductible

Answer: (A)

The main idea is to prevent underinsurance. A coinsurance clause sets a required percentage of value that the insured must carry in coverage (like 80% or 90%). When the insured meets that percentage, losses are paid up to the policy limits as usual. If the insured falls short, the insurer reduces the payout proportionally to the ratio of actual coverage to required coverage, meaning the insured bears more of the loss. This setup encourages buying enough insurance to meet the stated percentage and protects the insurer from being left with losses funded only by a partner’s underpaying policy. It isn’t about raising premiums, limiting coverage to listed insureds, or lowering the deductible, so those are not the primary purposes of the clause.

The main idea is to prevent underinsurance. A coinsurance clause sets a required percentage of value that the insured must carry in coverage (like 80% or 90%). When the insured meets that percentage, losses are paid up to the policy limits as usual. If the insured falls short, the insurer reduces the payout proportionally to the ratio of actual coverage to required coverage, meaning the insured bears more of the loss. This setup encourages buying enough insurance to meet the stated percentage and protects the insurer from being left with losses funded only by a partner’s underpaying policy.

It isn’t about raising premiums, limiting coverage to listed insureds, or lowering the deductible, so those are not the primary purposes of the clause.