What is the effect of a coinsurance penalty on the payout for partial losses?

A coinsurance penalty applies when a policyholder has not adhered to the coinsurance clause in their insurance policy. This clause typically requires the insured to carry insurance coverage equal to a specified percentage of the property's value—often around 80% or more. When the insured property is underinsured (meaning the coverage falls below the required percentage), and a partial loss occurs, the payout from the insurance company is reduced based on the degree of underinsurance.

In cases where a coinsurance penalty is invoked, the insurance company will calculate the payout based on the actual loss sustained, adjusted for the amount of insurance carried relative to the amount that should have been carried. Therefore, if the insured fails to meet the coinsurance requirement, they will effectively receive a lower payout than they would have if they had sufficient coverage. This results in the insured receiving less compensation for their partial loss, hence reducing the payout amount.

This understanding is crucial for policyholders to ensure they are adequately insured to avoid such penalties and maximize their insurance benefits in the event of a loss.