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

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

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Answer #1

Coinsurance Clause is used in insurance contracts by insurance companies for insurance policies for real estate such as buildings. The fundamental purpose of this clause is to ensure that policyholders insure their property for a fair value and the insurer receives a fair premium for the risk. Coinsurance is usually expressed as a percentage. Most coinsurance clauses require policyholders to insure up to 80, 90 or 100% of the real value of a property. For example, a building with a replacement value of $ 5,000,000 must be insured with a 90% co-insurance for at least $ 4,500,000. The same building with an 80% co-insurance clause must be insured for at least $ 4,000,000.

If an owner insures the property for less than the amount required in the co-insurance clause, he becomes a "co-insurer" and shares the damage with the insurance company.

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