What is the primary purpose of the coinsurance clause in property insurance?

The primary purpose of the coinsurance clause in property insurance is to encourage policyholders to insure their property to a specified percentage of its value. This clause typically requires that the insured maintains coverage equal to a certain percentage of the property's value, often expressed as 80%, 90%, or 100%. When a policyholder meets this requirement, they benefit by receiving full payment for a loss without penalties.

If the insured amount is below this threshold, the coinsurance clause can lead to a reduced payout in the event of a claim, effectively functioning as a financial incentive for policyholders to have adequate coverage. By encouraging proper insurance levels, the coinsurance clause helps ensure that both the insurer and the insured are appropriately protected and that the insured does not face substantial financial risk due to underinsurance.