What does the term "coinsurance" refer to in property insurance?

The term "coinsurance" in property insurance specifically refers to a provision mandating that the insured maintain a certain percentage of the property's value in coverage. This requirement is designed to encourage policyholders to insure their property to a value that accurately reflects its worth.

For instance, if a property has a value of $100,000 and the coinsurance requirement is set at 80%, the policyholder must insure the property for at least $80,000. If the insured amount falls below this threshold at the time of a loss, the insurer may penalize the insured by reducing the claim payout according to the ratio of the actual coverage to the required coverage. This ensures that the insured has a vested interest in maintaining adequate insurance levels, which helps to protect the insurer's risk as well.

Understanding this concept is essential for policyholders to avoid potential penalties or underinsurance during a claim process.