In coinsurance, what happens if the insured carries less than the required percentage of value?

• A. Not reduced; insurer pays full loss up to policy limit.
• B. Proportionally reduced based on the level of insurance carried.
• C. Denied entirely.
• D. Increased to encourage adequate coverage.

Answer: (B)

A coinsurance clause requires the insured to carry a minimum percentage of the property's value. If that minimum isn’t met, losses are paid only in proportion to the amount of insurance carried, not in full. For example, if the property's value is 100,000 and the coinsurance requirement is 80% (meaning you should carry 80,000), but you have only 60,000, your payout is 60,000/80,000 of the loss. So a 20,000 loss would be paid as 15,000 (assuming it doesn’t exceed the policy limit). This proportional reduction reflects underinsurance and ensures the insured shares more risk when coverage is insufficient.