How is the loss settlement calculation defined in terms of coinsurance?

The loss settlement calculation in terms of coinsurance is defined as the ratio of the amount of insurance the policyholder carries, divided by the amount of insurance that is actually required, multiplied by the loss. This formula is crucial in determining the compensation the insured receives in the event of a claim, especially in scenarios where the insured amount is less than the required amount, known as underinsurance.

In practical terms, this means that if a property is insured for an amount lower than what is necessary to meet the coinsurance requirement, any claim payout will be reduced. The calculation ensures that policyholders have a financial incentive to maintain adequate coverage, aligning their insurance amount closely with the property’s value. This approach protects insurers from adverse selection and helps stabilize premiums across the board.

Understanding this definition helps in grasping how proper coverage levels affect loss payments and the implications of coinsurance clauses in insurance policies.