Under which clause does the insured agree to maintain insurance equal to some selected percentage of value of the property?

Under which clause does the insured agree to maintain insurance equal to some selected percentage of value of the property?

• A. Coinsurance clause
• B. Subrogation clause
• C. Named peril endorsement
• D. Loss payable clause

Answer: (A)

The main idea here is the coinsurance clause, which requires the insured to carry insurance equal to a specified percentage of the property's value (often the replacement cost). This clause enforces proper valuation and risk transfer: if you insure for less than that percentage, your loss payment is reduced proportionally to the shortfall. For example, if the property’s replacement cost is 100,000 and the coinsurance requirement is 80%, you must carry at least 80,000. If a loss of 20,000 occurs but you only have 60,000 of coverage, the insurer would pay (60,000 / 80,000) × 20,000 = 15,000 (subject to policy limits). This mechanism discourages underinsuring. Subrogation deals with the insurer’s right to recover from third parties after paying a claim; a named peril endorsement specifies which perils are covered; a loss payable clause designates who receives payment or the conditions of payment. None of these describe maintaining coverage to a percentage of value the way coinsurance does.

The main idea here is the coinsurance clause, which requires the insured to carry insurance equal to a specified percentage of the property's value (often the replacement cost). This clause enforces proper valuation and risk transfer: if you insure for less than that percentage, your loss payment is reduced proportionally to the shortfall.

For example, if the property’s replacement cost is 100,000 and the coinsurance requirement is 80%, you must carry at least 80,000. If a loss of 20,000 occurs but you only have 60,000 of coverage, the insurer would pay (60,000 / 80,000) × 20,000 = 15,000 (subject to policy limits). This mechanism discourages underinsuring.

Subrogation deals with the insurer’s right to recover from third parties after paying a claim; a named peril endorsement specifies which perils are covered; a loss payable clause designates who receives payment or the conditions of payment. None of these describe maintaining coverage to a percentage of value the way coinsurance does.