In property insurance, what does "co-insurance" mean?

In property insurance, "co-insurance" refers to a clause that necessitates the insured to maintain a minimum percentage of coverage on their property relative to its total value. This is commonly expressed as a percentage, such as 80%, 90%, or 100%. The purpose of co-insurance is to encourage policyholders to insure their property for an adequate amount, reflecting its actual value. If the property is underinsured according to the stipulated co-insurance percentage at the time of a loss, the insurer can reduce the payout proportionately.

For instance, if a property is valued at $500,000 and the co-insurance requirement is set at 80%, the property owner should maintain a minimum coverage of $400,000. If they only insure it for $300,000 and then suffer a loss, their claim would be settled based on the ratio of the amount insured to the amount they should have insured. This mechanism helps to keep premiums fair and ensures that the insured does not benefit excessively from underinsuring their property.

Understanding co-insurance is crucial for both brokers and clients, as it directly impacts the adequacy of the coverage and the financial outcomes after a loss.