What does the Co-Insurance Clause require policyholders to do?

The Co-Insurance Clause requires policyholders to insure property for a percentage of its replacement value, which is generally specified in the policy, most commonly 80%, 90%, or 100%. This clause is designed to encourage policyholders to carry adequate insurance and avoid underinsurance. If a policyholder fails to meet the minimum requirement specified by the co-insurance percentage, they can incur a penalty at the time of a claim, which could mean that they would only be compensated for a proportionate amount of the loss based on the ratio of insurance carried to the required insurance amount.

For example, if the property has a replacement value of $100,000 and the policy requires an 80% co-insurance, the policyholder must carry at least $80,000 in coverage. If they only carry $60,000, any claim would be subject to a co-insurance penalty, which means they might receive less than the full amount of their loss. This concept is crucial for both insurers and insured as it promotes responsible insurance purchasing and provides a fair assessment in the event of a claim.

The other choices do not accurately define the purpose of the Co-Insurance Clause. Insuring property for total value, limiting coverage to one type of loss,