What is a co-insurance clause in property insurance?

A co-insurance clause in property insurance is a condition that requires the policyholder to insure the property for a specified percentage of its total value, typically 80%, 90%, or 100%. This clause is designed to encourage policyholders to purchase adequate amounts of insurance to reflect the true value of their property. If a policyholder fails to meet this requirement and subsequently files a claim, the payout from the insurance company may be reduced based on the underinsured amount, leading to a potential penalty in the claim settlement.

This mechanism ensures that insurance companies are not overburdened with claims for properties that are significantly undervalued, and it also encourages insureds to maintain proper levels of insurance to avoid financial loss in the event of damage. In essence, it supports the goal of indemnification by aligning the coverage amount with the actual value of the insured property.

The other options do not accurately capture the essence of the co-insurance clause. For instance, ensuring full coverage of claims does not adequately reflect the requirements set forth in co-insurance. Similarly, limiting coverage to fire damage or relating co-insurance to the payment of dividends on premiums does not align with the fundamental concept of co-insurance in property insurance.