Washington State Insurance Practice Exam

What does the term "coinsurance" often encourage in property insurance policies?

1. Full value coverage of the property

2. Shared financial responsibility for claims between the insured and insurer

3. The prevention of over-insurance

4. Minimization of administrative costs

The correct answer is: Shared financial responsibility for claims between the insured and insurer

Coinsurance in property insurance policies refers to a provision that requires the insured to maintain a certain level of coverage relative to the total value of the property. This means that the insured agrees to share in the financial responsibility for claims, which directly ties into the principle of coinsurance. When a policy has a coinsurance clause, it often stipulates that the insured must carry insurance equal to a specified percentage of the property's actual cash value or replacement cost. If the insured fails to meet this requirement and suffers a loss, they will only receive a payout based on the proportion of the amount they actually insured compared to the amount they should have insured. This arrangement encourages the insured to adequately cover their property, ensuring that both parties share the risk. By requiring a minimum coverage limit, insurers can protect themselves from underinsurance, while also prompting the insured to consider the true value of their property and the necessity of proper coverage, thereby sharing the financial implications of losses.