Question

Which is the function of the coinsurance clause in fire policies?

1) to require the insured to carry insurance to value
2) to discourage the insured from insuring to value
3) when more than one company is insuring the same subject of insurance, the coinsurance clause apportions the loss among them
4) when a policy covers several buildings under one amount of insurance, the coinsurance clause distributes the amount of coverage on the buildings

Answer 1

The coinsurance clause in fire policies has the function of ensuring that policyholders carry enough insurance to cover the value of their property. It reduces moral hazard by having the insured share in the risk and discourages underinsurance. If the insured fails to carry adequate insurance, they receive a reduced payout during a claim. so, option 4 is the correct asnwer.

Step-by-step explanation:

The function of the coinsurance clause in fire insurance policies is to require the insured to carry insurance that reflects the value of the property insured. This requirement ensures that the policyholder maintains a sufficient level of coverage, typically a percentage of the total value of the property, to receive full reimbursement in the event of a loss. If the coverage is less than the required percentage, the policyholder becomes a co-insurer and will receive a reduced payout in proportion to the amount of underinsurance.

By using a coinsurance clause, insurance companies aim to encourage policyholders to insure their property to its full value, which helps prevent underinsurance. This approach also helps to reduce moral hazard, by involving the policyholder in sharing the risk and thereby discouraging them from acting recklessly knowing that the insurer will cover all losses.