What does it mean when a policy has a "co-insurance" clause?

When a policy includes a "co-insurance" clause, it means that the policyholder is required to insure the property for a specific percentage of its total value to benefit from full coverage in the event of a loss. This percentage is typically set by the insurer and is usually around 80%, 90%, or 100%.

If the policyholder fails to insure the property for the required percentage and a claim occurs, the insurer may reduce the payout based on the actual amount of coverage versus the required amount. Thus, the co-insurance clause ensures that the policyholder has a vested interest in maintaining adequate insurance levels, aligning their coverage with the property's value. This mechanism helps to protect both the insurer and the insured by ensuring that adequate funds are available in case of a significant loss.