How does the coinsurance clause work in a Dwelling Policy?

The coinsurance clause in a Dwelling Policy is designed to encourage policyholders to insure their property to a certain percentage of its value, typically 80%, 85%, or sometimes even up to 100%. This requirement ensures that policyholders maintain an appropriate level of coverage relative to the total value of their property.

When a policyholder insures their dwelling for less than the required amount, and a loss occurs, the coinsurance clause can result in a reduced payout. The formula in the coinsurance provision compares the actual amount of insurance carried to the required amount, which influences the claim payment based on the shortfall. This promotes adequate insurance levels and discourages underinsurance, ensuring that the insurer can fairly distribute risk among all policyholders.

The other choices focus on aspects that are not part of the definition or function of the coinsurance clause. While the premium paid, claims process, and coverage limits are all relevant to dwelling policies, they do not pertain specifically to how the coinsurance clause operates within that context.