What does a coinsurance clause require in property insurance?

The requirement for a coinsurance clause in property insurance is that the insured must maintain coverage equal to at least 80% of the property's replacement cost. This provision incentivizes policyholders to insure their properties for an adequate amount, thereby ensuring that they are sufficiently covered in the event of a loss. If a property is underinsured, the coinsurance clause may result in reduced claims payments, proportional to the amount of insurance purchased compared to the amount that should have been insured.

The rationale behind this is to spread risk more evenly between the insurer and the insured, ensuring that policyholders do not underinsure their properties to save on premiums. By requiring a minimum level of coverage, the insurer can better predict potential loss amounts and manage risk effectively, which ultimately benefits both parties in the long run.