What is the purpose of the coinsurance clause in property insurance?

The purpose of the coinsurance clause in property insurance is to encourage sufficient coverage of the property value. This clause is a provision that requires the policyholder to carry insurance equal to a specified percentage of the property's total value, often 80%, 90%, or 100%. If the insured property is underinsured at the time of a loss, the insurance company may reduce the payout based on the percentage of coverage relative to the property value.

By incorporating a coinsurance requirement, insurers motivate policyholders to adequately insure their property so that they are protected against significant loss. This aligns the interest of both the insurer and the insured, as adequate coverage helps to ensure that the policyholder can recover fully from a loss, and it mitigates the insurer's risk of larger payouts due to underinsurance.

Therefore, the coinsurance clause plays a critical role in promoting responsible insurance purchasing behavior, ensuring that policyholders are protected in the event of significant losses.