What consequence does an insured face for not meeting the coinsurance requirement?

When an insured fails to meet the coinsurance requirement, they can expect reduced claims payments in the event of a loss. Coinsurance is a provision that requires the policyholder to insure their property for a specified percentage of its total value, typically around 80% or more. If the property is underinsured below this threshold, any claim made after a loss will be subject to a penalty, often resulting in the claim payment being reduced proportionately.

For example, if a homeowner has a property valued at $100,000 but only insures it for $60,000, and the coinsurance requirement is 80%, they are not meeting the requirement. If a covered loss occurs that costs $20,000 to repair, the insurer will calculate the payment using the actual amount insured versus the required amount. This means the claim will be adjusted, potentially reducing the payout significantly because the insured did not carry enough coverage to meet the policy's stipulations.

This principle serves to encourage policyholders to maintain adequate coverage in line with the property's value, ensuring that they are adequately protected and reducing the risk for the insurer.