Which statement best describes how a coinsurance penalty affects the payout when a property is underinsured?

Which statement best describes how a coinsurance penalty affects the payout when a property is underinsured?

• A. Payment is increased
• B. Payment is reduced proportionally
• C. Payment is unaffected
• D. Payment is capped at deductible

Answer: (B)

Coinsurance in property insurance makes the payout depend on how much coverage was carried relative to the required amount. If you don’t insure to the required level, the insurer applies a penalty that reduces the claim payment in proportion to the shortfall. The general rule is: payout = (actual insurance carried / required insurance) × loss, subject to policy limits. So, if you underinsure, the loss is not paid in full; instead, the payment is scaled down by the same proportion as your coverage is to the amount that should have been carried. For example, if you should have $80,000 of coverage but only have $60,000, and you suffer a $20,000 loss, the payout would be (60,000 / 80,000) × 20,000 = $15,000. This proportional reduction explains why the correct statement is that the payment is reduced proportionally. The coinsurance penalty does not increase the payout, it does not leave the payout unchanged, and it is separate from the deductible amount.

Coinsurance in property insurance makes the payout depend on how much coverage was carried relative to the required amount. If you don’t insure to the required level, the insurer applies a penalty that reduces the claim payment in proportion to the shortfall. The general rule is: payout = (actual insurance carried / required insurance) × loss, subject to policy limits.

So, if you underinsure, the loss is not paid in full; instead, the payment is scaled down by the same proportion as your coverage is to the amount that should have been carried. For example, if you should have $80,000 of coverage but only have $60,000, and you suffer a $20,000 loss, the payout would be (60,000 / 80,000) × 20,000 = $15,000. This proportional reduction explains why the correct statement is that the payment is reduced proportionally. The coinsurance penalty does not increase the payout, it does not leave the payout unchanged, and it is separate from the deductible amount.