How does co-insurance operate?

Co-insurance operates by sharing a portion of the claim costs between the insurer and the insured. This approach typically requires the insured to carry a certain percentage of the total insurance coverage or to maintain a minimum level of insurance relative to the value of the property. In the event of a claim, both parties contribute to the covered expenses according to the agreed-upon percentages.

For example, if a property is insured for only a portion of its total value, and a loss occurs, the co-insurance clause may require the insured to cover a percentage of the loss based on how much they are insured compared to the property's actual value. This encourages policyholders to insure their property for an adequate amount and promotes shared responsibility in risk management.

This understanding is crucial because it helps the insured comprehend their financial responsibilities and the importance of maintaining proper coverage levels to avoid penalties during claims.