How does "coinsurance" function in property insurance?

Coinsurance in property insurance functions by requiring policyholders to insure their property for a specified percentage of its total value. This principle encourages insured individuals to carry a sufficient amount of coverage relative to the value of their property. If a policyholder fails to meet the coinsurance requirement and experiences a loss, the insurer may apply a penalty, reducing the amount of the claim reimbursement.

This mechanism serves to ensure that insured values align closely with actual values, thus preventing underinsurance. By setting a required coinsurance percentage, insurers help maintain equitable risk-sharing and limit losses from underinsured claims. This aligns with the concept that if a property is over-insured, it may lead to moral hazard situations where the insured may not take proper care of their property, knowing they will be fully compensated.

The other options, while relevant to broader insurance concepts, do not accurately describe how coinsurance works in the context of property insurance. Full reimbursement is not guaranteed if coinsurance requirements are not met. Coinsurance does not directly influence deductible amounts, which are separate terms set in the policy. While coinsurance may indirectly deter some forms of fraud by enforcing proper valuation, its primary function is to ensure adequate coverage.