Which statement best describes the effect of a coinsurance penalty?

Which statement best describes the effect of a coinsurance penalty?

• A. The insurer pays the full loss up to policy limits even if underinsured
• B. The insurer reduces the payout proportionally to the degree of underinsurance
• C. The insurer increases the deductible automatically
• D. The insurer refunds the premium

Answer: (B)

Coinsurance penalties in property insurance require the insured to carry coverage that meets a specified percentage of the property's value. When the insured is underinsured, the insurer reduces the payout in proportion to how far short the coverage is of that percentage. This means the payment from the insurer equals (actual insurance carried ÷ required insurance) times the loss, limited by the policy's limits. For example, if the value is 100,000 and the coinsurance clause requires 80%, the required amount is 80,000. If you carry 60,000 and experience a 50,000 loss, the insurer pays (60,000/80,000) × 50,000 = 37,500, leaving you to cover the remaining 12,500. This approach explains why the payout isn’t full up to the limit and shows why underinsuring leads to a proportionally reduced settlement, rather than adjustments like higher deductibles or premium refunds.

Coinsurance penalties in property insurance require the insured to carry coverage that meets a specified percentage of the property's value. When the insured is underinsured, the insurer reduces the payout in proportion to how far short the coverage is of that percentage. This means the payment from the insurer equals (actual insurance carried ÷ required insurance) times the loss, limited by the policy's limits. For example, if the value is 100,000 and the coinsurance clause requires 80%, the required amount is 80,000. If you carry 60,000 and experience a 50,000 loss, the insurer pays (60,000/80,000) × 50,000 = 37,500, leaving you to cover the remaining 12,500. This approach explains why the payout isn’t full up to the limit and shows why underinsuring leads to a proportionally reduced settlement, rather than adjustments like higher deductibles or premium refunds.