What is the purpose of the coinurance clause in property insurance policies?

The purpose of the coinsurance clause in property insurance policies is to encourage policyholders to insure their property to its full value. This clause typically requires the policyholder to insure their property at a specified percentage of its actual cash or replacement value to receive full benefits in the event of a loss. If the insured property is underinsured at the time of a loss, the coinsurance clause comes into effect, and the insured may receive a reduced payout proportional to the amount of insurance maintained compared to the value of the property.

This mechanism helps ensure that policyholders take the necessary steps to adequately protect their assets, thus minimizing the risk of significant underinsurance that could occur in the event of a claim. It fosters responsible behavior in maintaining appropriate coverage levels, which ultimately benefits both the insurance company and the insured.