What happens if an insured carries less than the required amount under a coinsurance clause?

When an insured carries less than the required amount of insurance under a coinsurance clause, they are subject to a penalty that impacts how claims are paid out in the event of a loss. The coinsurance clause is designed to encourage policyholders to carry an adequate amount of insurance relative to the total value of the property being insured.

If a loss occurs, and the insured is underinsured, they will only receive a portion of the loss based on the amount of coverage they have compared to the coinsurance requirement. This is calculated using a formula that considers the actual amount insured and the required amount. Hence, if the insured has less coverage than required, the reimbursement for partial losses will be reduced according to this proportion.

This mechanism ensures that the insured is incentivized to maintain adequate coverage levels to avoid significant financial loss during claims. Therefore, when there is an underinsurance situation, they receive a reduced payout rather than facing total loss denial or being covered for the full amount.