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How is the coinsurance clause determined in property insurance?

  1. Insurance required/Insurance carried X amount of loss

  2. Insurance carried/Insurance required X amount of loss

  3. Insurance required amount divided by property value

  4. Insurance premium divided by coverage limits

The correct answer is: Insurance carried/Insurance required X amount of loss

The coinsurance clause in property insurance is calculated using the formula where the insurance carried is divided by the insurance required, then multiplied by the amount of loss. This calculation is designed to encourage policyholders to carry a sufficient amount of insurance coverage that is proportional to the value of their property. When the insured carries an amount less than the required amount, a coinsurance penalty can be applied. The purpose of the coinsurance clause is to promote adequate coverage and to protect the insurer from potential losses due to underinsurance. By determining the reimbursement amount based on this ratio, it ensures that the insured shares a portion of any loss that occurs, thereby mitigating the insurer's risk. The other options do not accurately represent the correct method for calculating coinsurance. For example, simply dividing the required amount by the property value does not account for the actual coverage purchased by the policyholder, which is critical in determining their financial responsibility in the event of a claim. Similarly, referencing insurance premiums in relation to coverage limits does not provide a clear method for coinsurance calculation and fails to capture the necessary relationship between insurance carried and insurance required.