What is the purpose of insurance coinsurance clauses?

Insurance coinsurance clauses are designed to encourage the insured to maintain an adequate level of coverage for their property. The fundamental idea behind a coinsurance clause is that the policyholder must insure their property for a certain percentage of its total value, typically 80%, 90%, or 100%. If the property is underinsured at the time of a loss, the insured will face a penalty when filing a claim, which may result in reduced payout amounts.

This requirement serves to protect both the insurer and the insured. It ensures that the insured has a vested interest in properly valuing their property and maintaining sufficient coverage to account for potential losses. By doing so, it helps prevent situations where policyholders might take out policies for less than the actual value of their property, resulting in inadequate compensation in the event of a significant claim.

In summary, the purpose of a coinsurance clause is to promote adequate insurance coverage, ensuring that the insured is not only protected but also that claims can be fully honored in accordance with the property's value.