What is a Coinsurance Penalty?

A coinsurance penalty is the amount that is not paid by the insurance company as a result of the policyholder’s failure to meet the coinsurance requirement outlined in their property insurance policy. Coinsurance is a provision that requires the insured to insure their property for a specified percentage of its total value; typically, this is set at 80%, 90%, or even 100%. If the insured fails to maintain this required level of coverage, they may incur a coinsurance penalty when they file a claim.

When a claim is made, and the insured has not maintained the proper coverage, the insurer can apply a penalty to the payout, typically reducing the amount they would otherwise owe. This mechanism is designed to encourage policyholders to insure their property adequately and to discourage underinsurance. Thus, the correct answer addresses how non-compliance with the coinsurance requirement directly impacts the claim settlement process.