What is the purpose of a coinsurance clause in an insurance policy?

The coinsurance clause in an insurance policy serves the primary purpose of ensuring that the property is insured for its full value. This clause establishes a requirement that the insured must maintain coverage at a specified percentage of the property's actual cash value or replacement cost. Commonly, this percentage is set at 80%, 90%, or 100%.

When property is insured for less than this required amount, and a loss occurs, the insurer may not fully compensate the policyholder based on the proportion of the insurance purchased relative to the required coverage. This is important because it encourages property owners to adequately insure their assets, ensuring that they are sufficiently protected against potential losses and reduces the risk for the insurer as well.

This concept aligns well with the idea of shared responsibility and risk. The insured is motivated to carry appropriate coverage levels, while the insurer limits its exposure to significant losses on underinsured properties. Thus, the coinsurance clause helps maintain a balance between risk sharing and ensuring proper asset protection.