What is the purpose of a 'co-insurance clause' in a homeowners policy?

The purpose of a co-insurance clause in a homeowners policy is to ensure that policyholders maintain adequate coverage for their property. This clause is designed to encourage homeowners to insure their property for a specified percentage of its total value—commonly 80%, 90%, or 100%. If the insured value is below this threshold at the time of a loss, the claim payment may be reduced in proportion to the level of underinsurance.

For example, if a home is valued at $200,000 and the co-insurance requirement is 80%, the homeowner must have at least $160,000 in coverage to be fully protected. If the homeowner only carries $120,000, which is below the required amount, and they experience a loss, they may receive only a partial payment based on the amount of coverage they actually have compared to the required level. This structure encourages homeowners to accurately assess and maintain the proper amount of coverage to protect their assets effectively.

In contrast, while increasing premiums and offering initial discounts may relate to the general insurance market, these factors do not directly reflect the essential role that the co-insurance clause plays in the protection of policyholders. Similarly, limiting the number of claims filed is not a function of the co-ins