What is the purpose of coinsurance in property policies?

• A. To apply only to flood coverage.
• B. To limit coverage to named perils only.
• C. To require the insured to maintain a minimum percentage of coverage on the property (typically 80-90%); otherwise loss is not fully reimbursed.
• D. To reduce premiums automatically as property value increases.

Answer: (C)

The main idea here is that coinsurance is about making sure you carry enough insurance to match the property’s value, so a loss is reimbursed fairly. Most property policies require you to insure to a minimum percentage of the replacement cost (commonly 80% to 90%). If you meet or exceed that minimum, a covered loss is paid up to the policy limit minus deductible. If you fall short, the insurer reduces the payout in proportion to how much you were underinsured.

For example, suppose the replacement cost of the property is $200,000 and the minimum required coverage is 80% ($160,000). If you actually insure for $120,000, you’ve only got 60% of the required amount (120,000 / 160,000 = 0.75, which is 75% of the required). If a $40,000 loss occurs, the payout would be 75% of that loss, or about $30,000, and you’d cover the remaining $10,000 yourself. This illustrates how coinsurance encourages maintaining adequate coverage rather than letting the insured choose a lower limit to save on premiums.

This concept isn’t about limiting to named perils or about flood coverage, and it doesn’t automatically reduce premiums as property value rises. It’s a mechanism to ensure coverage levels reflect the property’s value and to share risk between the insurer and the insured.