What is a coinsurance clause?

A coinsurance clause is a provision that requires the insured to maintain coverage equal to a specified percentage of the value of the insured property, usually 80%, 90%, or 100%. This provision is designed to encourage policyholders to insure their property at adequate levels, helping to ensure that if a loss occurs, the insurance company can provide appropriate compensation based on the current value of the property.

When this clause is in place, if the insured does not carry the minimum required amount of insurance relative to the property's value, they may face a penalty during a claim, such as a reduction in the payout. This conveys the importance of ensuring that the coverage aligns with the actual value to avoid underinsurance.

The other options do not accurately describe the purpose or function of a coinsurance clause. For instance, eliminating premiums or allowing policyholders to choose coverage limits does not reflect the fundamental purpose of promoting adequate property insurance. Additionally, a penalty for not filing claims on time is unrelated to the concept of coinsurance, as it pertains to the claims process rather than the insurance coverage itself.