South Carolina Personal Lines Practice Exam

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

1. To reduce claim payments during emergencies

2. To encourage insuring property at close to its value

3. To simplify the claims process

4. To mandate policy renewals

The correct answer is: To encourage insuring property at close to its value

The primary purpose of a coinsurance clause in property insurance is to encourage policyholders to insure their property at or near its actual value. This clause is designed to promote adequate coverage by requiring the insured to carry a specific percentage of the property's value (commonly 80%, 90%, or 100%), which helps ensure that they are not underinsured. When a coinsurance clause is in effect, if the insured amount is less than the required percentage of the property’s value, any claim payment may be reduced in proportion to the amount of insurance purchased versus the amount required. This incentivizes property owners to accurately assess and select appropriate coverage levels, safeguarding against financial loss in the event of a claim. This practice also helps insurers maintain a more stable risk pool, as it minimizes the number of underinsured properties that could lead to large losses when a claim occurs. By encouraging adequate coverage, the coinsurance clause ultimately works to balance the risk for insurers while protecting the financial interests of the insured.