How does Coinsurance or insurance to value function?

Coinsurance or insurance to value is a principle that mainly applies to property insurance, particularly in determining how much coverage a property should have in relation to its value to avoid penalties during a claim. When an insured property is covered for less than a certain percentage, typically 80%, the coinsurance clause comes into play.

This means that if a policyholder has not insured their property to at least that required percentage, they will bear a portion of the loss themselves if a claim is made. For example, if the property value is $100,000 and the required coverage is at least $80,000, but the insured has only $60,000 worth of coverage, they would be penalized when it comes time to settle a claim. The insurer will calculate the loss based on the actual coverage rather than the total value of the property, leading to reduced compensation. This mechanism encourages policyholders to insure their property for its full value to avoid financial loss in the event of damage or destruction.

The function of coinsurance serves two purposes: it aims to ensure that property owners maintain adequate coverage to reflect the true value of their assets, and it protects insurers from the risk of underinsurance, which could lead to higher claims liabilities.