What does the “coinsurance” clause in property insurance require?

The "coinsurance" clause in property insurance is designed to encourage policyholders to carry an appropriate amount of insurance relative to the value of the property they are insuring. This clause typically requires insured parties to maintain a minimum percentage of coverage (often 80%, 90%, or sometimes 100%) of the property's total value.

When a policyholder does not meet this required percentage at the time of a loss, they may not receive the full claim amount, as their coverage would be considered inadequate. The intent is to prevent underinsurance, ensuring that insureds have sufficient coverage in the event of a loss while also potentially lowering premiums since the risk is shared between the insurer and the policyholder.

This requirement can lead to reduced payouts in cases where the insured value falls below the stipulated coinsurance percentage, reflecting the principle of indemnity, where the insurance is meant to restore the policyholder to their pre-loss financial position, not to provide a profit from insurance proceeds.