What is the primary purpose of a Co-Insurance clause?

The primary purpose of a Co-Insurance clause is to discourage the insured from gambling on suffering only a partial loss. This clause typically requires the policyholder to insure their property for a specified percentage of its total value (commonly 80%, 90%, or 100%) to receive full compensation for a loss. If the insured fails to meet this valuation, they will face a penalty in the event of a partial loss, where compensation may be reduced based on the amount of insurance carried compared to the actual value of the property.

By enforcing this requirement, the Co-Insurance clause encourages policyholders to accurately assess and insure their property to its full value. This serves to mitigate the risk taken by both the insured and the insurer, ensuring that the insured has a vested interest in protecting their assets properly and not just opting for minimal coverage in hopes of only suffering small losses. As a result, this clause aligns the interests of the insurer and the insured, promoting responsible risk management practices.