What is a "co-insurance clause"?

A co-insurance clause is a provision in an insurance policy that requires the insured to maintain coverage equal to a specified percentage of the total value of the property being insured. This percentage is often set at 80%, 90%, or 100% of the property's value. The purpose of the co-insurance clause is to encourage policyholders to insure their property adequately. If the insured fails to meet this requirement and suffers a loss, they may incur a penalty that reduces the claim payout proportionately to the underinsurance.

This clause is particularly important in property insurance, as it helps to stabilize the insurance market by preventing policyholders from underinsuring their properties and thus ensuring that premiums remain fair for all policyholders. If a co-insurance requirement is not met, the insurer may apply a co-insurance penalty, which can lead to significant financial consequences for the insured. Therefore, understanding the implications of the co-insurance requirement is crucial for property owners when selecting coverage.