Which statement about coinsurance is NOT true?

• A. It requires the insured to insure to a stated percentage of value to share risk.
• B. If underinsured, losses are prorated.
• C. It does not affect the loss settlement method.
• D. It is designed to encourage adequate coverage.

Answer: (C)

Coinsurance creates a requirement to insure to a specified percentage of the property's value so you share the risk with the insurer. When you meet that percentage, a loss is settled based on the actual loss up to the policy limit. If you’re underinsured, the loss is prorated between you and the insurer according to how much you carried versus how much you should have carried. Because of this, the idea that coinsurance does not affect the loss settlement method isn’t true.

For example, if the replacement cost is 100,000 and the coinsurance requirement is 80% (you should carry 80,000). If you actually carry 60,000 and a 20,000 loss occurs, the payout would be 60,000 / 80,000 × 20,000 = 15,000. If you had carried 90,000, you’d receive the full 20,000 loss up to the policy limit. This shows how coinsurance changes how settlements are calculated.