What is coinsurance in property insurance?

Coinsurance in property insurance refers specifically to a provision that acts as a penalty for underinsuring property. It requires the insured to carry a certain minimum amount of insurance based on a percentage of the property's total value. If the insured fails to meet this requirement, they may not receive the full amount of their loss at the time of a claim, but rather a reduced amount contingent upon the actual limit of insurance carried compared to the required limit.

This system is designed to encourage policyholders to insure their properties adequately. If they do not, they risk a financial penalty during a claim, which would reduce their recovery amount based on the extent of underinsurance. The principle is that by setting a coinsurance requirement, insurers ensure that policyholders have a vested interest in maintaining adequate coverage, aligning their investment in the insurance with the true value of the property.