What is the definition of "co-insurance"?

The correct answer defines co-insurance as a clause requiring the insured to carry a certain percentage of the property’s value. This concept is essential in property insurance, as it serves to ensure that property owners maintain adequate coverage for their insured assets.

Under a co-insurance clause, if the insured fails to carry coverage equal to a specified percentage of the property's value, they may face penalties in the event of a loss. For example, if a property is valued at $100,000 and the co-insurance requirement is set at 80%, the policyholder must carry at least $80,000 in insurance. If a claim is made for a loss, and the insurance carried falls short of that amount, the insurer may reduce the payout based on the ratio of coverage to required coverage.

This mechanism encourages policyholders to insure their properties adequately, reducing moral hazard and ensuring that insurers are not unduly exposed to risk due to underinsurance.