Which of the following best describes the “coinsurance clause”?

The coinsurance clause is an important aspect of property insurance policies that works to ensure that the insured maintains a certain level of coverage that corresponds to the actual value of the property. This clause often has multiple components that emphasize the need for adequate insurance coverage.

The first part of the definition involves a requirement to maintain a minimum level of insurance coverage. This means that policyholders must insure their property for a value that meets or exceeds a specified percentage (often 80%, 90%, or 100%) of its actual cash value or replacement cost. Maintaining this minimum is crucial because it helps protect both the insurer and the insured against underinsurance.

The second element of the coinsurance clause pertains to the penalty applied when total insurance coverage is less than the value of the insured property. If a policyholder fails to meet the minimum coverage requirement, they face the risk of receiving reduced payouts in the event of a claim. This is significant because it ensures that the insured bears some responsibility for maintaining appropriate coverage levels.

Finally, the coinsurance clause may also allow the insurer to pay partial claims based on a percentage of coverage. If a claim is made and the insurer determines that coverage was inadequate due to the coinsurance requirement being violated, the payout may be reduced proportional to