What is the purpose of a coinsurance provision?

The purpose of a coinsurance provision is to reduce the insurer’s payout if the property is underinsured. This provision establishes a requirement for the insured to carry a minimum amount of insurance, typically expressed as a percentage of the property’s value. If the insured amount is less than this required amount, and a loss occurs, the insurer will adjust the payout based on the ratio of coverage carried to the amount that should have been carried per the coinsurance clause. This incentivizes policyholders to insure their property for its full value, thus sharing the risk between the insurer and the insured.

In essence, if a policyholder fails to meet the coinsurance requirement and suffers a loss, they may receive a reduced payout, which reflects the level of underinsurance. This mechanism encourages responsible coverage and helps maintain the insurer's financial stability by mitigating the risk of excessive payouts for underinsured properties.