What is an example of a penalty applied due to the coinsurance clause?

The concept of a coinsurance clause is integral to property insurance, as it incentivizes policyholders to insure their properties to a certain percentage of their value. When a property is insured for less than the required coinsurance percentage, any loss may result in a penalty reflected in the recovery amount.

In this context, if a policyholder has underinsured their property, the coinsurance clause may lead to a reduced recovery amount in the event of a loss. This means that instead of receiving the full amount of the claim, the insurer will adjust the payout according to the ratio of insurance coverage to the property's actual value. For example, if a property is worth $100,000 but is only insured for $50,000, and the coinsurance requirement is 80%, the recovery would be significantly less than it would be if the policyholder had met the insured value requirement.

This mechanism promotes responsible purchasing of insurance and ensures that claim payouts reflect the amount of risk the insurer has taken on relative to the property’s full value. It serves to protect insurance providers from losses that could occur due to inadequate coverage while also reinforcing the necessity for insured parties to maintain appropriate levels of coverage.