If less than 80% of the coverage is carried, what will be paid in case of a claim?

When less than 80% of the coverage is carried on a property insurance policy, the principle of coinsurance comes into play. This principle is designed to encourage policyholders to insure their property to a value that is close to its full replacement cost. When a claim occurs and the insured has not met the required threshold of coverage, the insurer calculates the payout based on either the actual cash value (ACV) or a proportion of the replacement cost, depending on the specific terms of the policy and the extent of the underinsurance.

Typically, if the property is underinsured, the payout will be reduced based on the ratio of the insurance carried to the required amount of coverage. For instance, if a property is valued at $100,000 and the policyholder only carries $60,000 in coverage, the insurance company may use the following formula:

(Insurance carried / Required insurance) x Loss = Payment

In this case, the payment would reflect a reduced amount based on the lack of coverage relative to the value of the property, which emphasizes the importance of adequate coverage. It's important for policyholders to understand that carrying proper insurance limits is vital to ensure full protection in the event of a claim.

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