How is the loss settlement calculated under a typical coinsurance clause?

The loss settlement under a typical coinsurance clause is calculated to encourage policyholders to insure their property to a specified percentage of its value, often 80%, 90%, or 100%. The formula used for calculating the loss settlement marks how insurance carried relates to the required insurance amount.

In this approach, the insurance carried is compared to the insurance required. If the policyholder insures their property for less than the required amount, they may face a penalty in the form of reduced claim settlements. The settlement is determined by taking the insurance carried, dividing it by the insurance required, and then multiplying by the loss amount. This approach ensures that the payout reflects the level of insurance that the policyholder has chosen in relation to the value of the property.

This calculation promotes responsibility in insurance purchasing while also providing some financial coverage should a loss occur. It serves as a reminder that maintaining sufficient coverage is crucial for adequate protection against potential losses.