Property and Casualty Insurance Practice Exam

What is the main requirement of a coinsurance clause?

1. The insured must carry 100% of property value

2. The insured must carry 80% of replacement cost value

3. The insured must carry a minimum of 50% of property value

4. There is no requirement for coverage

The correct answer is: The insured must carry 80% of replacement cost value

The main requirement of a coinsurance clause is that the insured must carry a specific percentage of the property's replacement cost value, often set at 80%. This clause is designed to encourage policyholders to insure their property for an adequate value relative to its replacement cost, ensuring that they share in the risk of loss. When a policy has a coinsurance clause that stipulates an 80% requirement, it means that if the insured property value is less than 80% of the property's actual replacement cost at the time of loss, the insurance payout will be reduced proportionately. This mechanism protects insurers by ensuring that the insured have a financial incentive to accurately insure their property. If the insured does not meet this minimum requirement, they may face a penalty in the form of a reduced claim payment at the time of a loss, reinforcing the importance of maintaining adequate coverage. Therefore, carrying 80% of the replacement cost value serves to maintain a balance between risk sharing and the insurer’s liability, effectively promoting responsible insurance practices.