Renewal Insurance 1 Practice Test

Coinsurance in property insurance hinges on meeting a stated percentage of the property’s value. This provision is designed to prevent underinsurance by encouraging you to carry enough coverage to reflect the actual value of what’s being insured. At the time of loss, if you have insured to that required percentage, the insurer typically pays the claim up to your limit. If you fall short of the required percentage, the claim is prorated—your payout is reduced in proportion to the ratio of your insurance carried to the required amount.

For example, if the property value is 100,000 and the coinsurance requirement is 80% (meaning you should carry at least 80,000), but you only have 60,000 insured, you’re underinsured by 20,000. The payout would be calculated as 60,000 ÷ 80,000 = 0.75, so you’d receive 75% of the loss amount (up to your 60,000 limit). This concept explains why the correct choice describes both meeting the stated percentage and facing a prorated settlement if you don’t. The other options don’t fit because coinsurance isn’t about paying a separate premium for full coverage, nor about insurer covering all losses regardless, nor about applying only to liability policies.