Washington State Insurance Practice Exam

What does coinsurance encourage policyholders to do?

1. File more claims

2. Be more cautious with the properties insured

3. Choose higher coverage limits

4. Reduce deductible amounts

The correct answer is: Be more cautious with the properties insured

Coinsurance is a provision in property insurance policies that requires the policyholder to insure their property for a specified percentage of its full value to receive full compensation in the event of a loss. This concept encourages policyholders to be more cautious with the properties they insure because it emphasizes the need for adequate coverage. If a policyholder fails to meet the coinsurance requirement, they may receive reduced compensation, which acts as a financial incentive to maintain and protect their property adequately. By requiring policyholders to share in the risk and ensuring they have a vested interest in maintaining their property at a certain value, coinsurance promotes responsible management and preventive measures to avoid losses. This typically influences them to take better care of their properties, leading to fewer and potentially less severe claims overall. Other options mention behaviors such as filing more claims, choosing higher coverage limits, or reducing deductibles, which are not the primary focus of coinsurance. Coinsurance is about ensuring sufficient coverage and fostering risk-aware decision-making, rather than just increasing claim frequency or changing coverage limits arbitrarily.