What is the function of a coinsurance clause?

The function of a coinsurance clause is to require a specified percentage of property value to be insured. This means that policyholders must insure their property for a certain percentage of its total value, typically around 80% to 90%. If the insured value falls below this requirement and a claim is made, the insurer will penalize the insured by reducing the payout proportionally based on the amount they did insure. This clause encourages policyholders to adequately cover their assets, ensuring that they bear a portion of the risk, which helps maintain the insurance pool's sustainability and fairness. By requiring an appropriate amount of coverage, the coinsurance clause aims to minimize underinsurance and its potential impact on the overall insurance system.