South Carolina Personal Lines Practice Exam

Does coinsurance apply in the event of a total loss?

1. Yes, it applies

2. No, it does not apply

3. Only partially applies

4. It depends on the insurer

The correct answer is: No, it does not apply

Coinsurance is a provision commonly found in property insurance policies that requires the insured to carry a certain percentage of insurance coverage relative to the total value of the property in order to receive the full amount of a claim in the event of a loss. However, in the case of a total loss, coinsurance generally does not apply because the policy will pay out the full insured value of the property, assuming that the coverage limits have been met. When a total loss occurs, the insurer typically pays the policyholder the full amount of coverage up to the limits specified in the policy, regardless of whether the homeowner maintained a specified coinsurance percentage. This is primarily because the purpose of coinsurance is to encourage the insured to maintain an adequate level of coverage to avoid underinsurance, but once a total loss claims the entire value of the property, that consideration is moot. Understanding this concept is important in navigating insurance policies as it informs policyholders how their coverage operates in scenarios of total loss, reassuring them that they will recover the full amount they insured for, rather than being penalized by coinsurance provisions.