What is coinsurance in property insurance and how does it affect settlements?

• A. Prohibits reduction of claim if underinsured.
• B. Requires the insured to carry minimum %; claims may be reduced if below threshold.
• C. Increases premium with no effect on claims.
• D. Is only used for health insurance.

Answer: (B)

Coinsurance in property insurance means you must carry a minimum percent of the property's value as insurance. If you meet that minimum, settlements typically pay the full loss amount up to the policy limit (minus any deductible). If you fall short of the required percent, the claim is reduced in proportion to how much you did carry versus what was required. For example, if the replacement value is 100,000 and the policy requires 80% coverage, you should carry at least 80,000. If a loss of 20,000 occurs but you only have 60,000, the insurer applies 60,000/80,000 = 0.75, so the payout would be 0.75 × 20,000 = 15,000 (before subtracting deductible). This shows why coinsurance affects settlements: underinsuring lowers the payout proportionally.