Texas All Lines Adjuster Practice Test

What does the Coinsurance Clause require from policyholders who have inadequate property insurance?

1. They must purchase additional coverage

2. They must pay a percentage of the claim

3. They are exempt from any out-of-pocket expenses

4. They receive a full payout without deductions

The correct answer is: They must pay a percentage of the claim

The Coinsurance Clause is a policy provision that encourages policyholders to insure their property for a certain percentage of its value, typically 80%, 90%, or 100%. If a property is underinsured, the clause stipulates that the policyholder must bear a portion of any loss, effectively sharing the financial burden with the insurer. In this context, if a policyholder has inadequate property insurance, they may be required to pay a percentage of the claim based on the ratio of the amount insured to the amount that should have been insured. This proportionate reduction in payout serves to reinforce the importance of maintaining adequate coverage and discouraging underinsurance. Purchasing additional coverage or being exempt from out-of-pocket expenses does not align with the purpose of the Coinsurance Clause, which necessitates that policyholders share in the risk, especially when their coverage is insufficient. Similarly, the idea that one would receive a full payout without deductions contradicts the very nature of the Coinsurance Clause, which is designed to penalize underinsurance rather than provide unqualified compensation.