In property insurance, what is the purpose of the coinsurance clause?

The purpose of the coinsurance clause in property insurance is primarily to encourage property owners to insure their properties to at least a specified percentage of the property's actual value. This requirement ensures that the property owner bears some responsibility for underinsurance. If a property owner fails to insure their property to the required level, they may face penalties in the event of a loss, resulting in a reduced payout from the insurer.

For instance, if a property is valued at $200,000 and the coinsurance clause requires it to be insured for at least 80% of that value, the owner needs to have coverage of at least $160,000. If they only insure it for $120,000 and a loss occurs, the compensation for a claim will be adjusted based on the amount of coverage relative to the required amount. This mechanism incentivizes policyholders to accurately assess and insure their property values, ultimately leading to more adequate coverage and reducing the potential for disputes during a claim process.

This concept is crucial in maintaining the financial health of an insurance pool, as it ensures that claims are aligned with the risk that insurers underwrite.