What happens in the case of a co-insurance penalty?

In the context of a co-insurance penalty, the insurer only covers a percentage of partial losses when the insured value of the property is less than the required minimum percentage of the property’s actual value. Co-insurance is a clause often found in property insurance policies that requires the policyholder to insure the property to a certain percentage of its value, typically ranging from 80% to 90%.

If the insured fails to meet the co-insurance requirement, a penalty is applied, leading to a reduction in the amount the insurer pays for partial losses. This means that the payout will be calculated based on the actual cash value of the damages, divided by the amount that should have been insured, multiplied by the amount of the loss, leading to a payout that reflects only a portion of the actual loss incurred.

The other choices do not align with the principle of co-insurance; the insurer does not cover all losses or provide full value for total loss under a co-insurance penalty, and a significant increase in premiums is not directly caused by the co-insurance clause itself but rather might be a general consequence of underinsurance risk management practices.