What is referred to as the Coinsurance Clause in an insurance policy?

The Coinsurance Clause in an insurance policy is primarily designed to encourage policyholders to insure their property for its full value. This clause states that if the insured property is underinsured at the time of a loss, the insured agrees to share in that loss. Essentially, it operates as a formula that determines the payout based on the amount of insurance purchased compared to the property's actual value.

This means that if a property is valued at $100,000 and the insured only carries $80,000 of coverage, they are considered to be underinsured. In the event of a claim, the payout may be reduced, reflecting the percentage of the insured amount to the actual value. This mechanism is meant to promote adequate coverage and reduce instances of moral hazard, where individuals might neglect to fully insure high-value items.

Other choices reference elements of insurance policies that do not relate to the concept of coinsurance in the same manner. For instance, a provision that limits damages for bodily injury pertains to specific liability coverage rather than property valuation responsibility. Similarly, requirements for actions to maintain coverage and clarifications on claims do not address the sharing of financial responsibility that coinsurance entails.