South Carolina Personal Lines Practice Exam

What is encouraged by the coinsurance clause in property insurance?

1. Underinsuring property

2. Overinsuring property

3. Insuring property close to its value

4. Reducing premiums

The correct answer is: Insuring property close to its value

The coinsurance clause in property insurance encourages insuring property close to its actual value to avoid penalties in the event of a loss. This clause establishes a standard percentage that the insured must maintain in order to receive the full amount of a claim in the event of a loss. If the insured property is underinsured, they may not receive compensation for the total loss amount, leading to a reduction in the claim payout. By requiring that a percentage of the property’s value be insured, the coinsurance clause aims to ensure that policyholders carry an appropriate amount of coverage. This not only protects the insurer from high claims resulting from underinsurance but also incentivizes policyholders to evaluate their coverage needs realistically and maintain adequate insurance levels. As a result, adhering to this requirement helps to ensure that policyholders are not financially strained when they need to recover from a loss.