What is 'co-insurance' in property insurance?

Co-insurance in property insurance refers to a clause requiring the policyholder to insure a property for a specific percentage of its total value, often set at 80%, 90%, or 100%. This concept is designed to encourage policyholders to maintain adequate coverage on their property. If a policyholder underinsures their property and a loss occurs, the insurance payout may be reduced based on the co-insurance percentage. For example, if a property valued at $100,000 is insured for $60,000 (which is below the 80% requirement), in the event of a loss, the insurer might apply a penalty to the claim settlement, reflecting the underinsurance.

This requirement is important, as it ensures that both the insurer and the insured share the responsibility for insuring property adequately. It encourages policyholders to properly assess the value of their assets and ensure they have sufficient coverage in place, which not only protects their interests but also helps stabilize the insurance market by reducing instances of significant underinsurance.