What is the formula to calculate the co-insurance penalty?

The formula to calculate the co-insurance penalty is correctly represented by the expression "Had / Should X the loss." This formula is central to understanding co-insurance clauses in property insurance policies.

In practical terms, "Had" refers to the amount of insurance coverage that the policyholder actually purchased, while "Should" represents the amount of insurance coverage that the policyholder should have carried based on the total value of the property (often a percentage of the property's value). This required amount is typically determined by the specific co-insurance percentage outlined in the policy, commonly 80%, 90%, or 100%.

When a policyholder fails to insure their property to at least the percentage required by the co-insurance clause, they incur a co-insurance penalty when a claim is made. The calculation then multiplies the fraction of actual coverage versus the required coverage by the loss amount, which helps to establish how much of the loss the insurer will pay. If the policyholder fails to meet the co-insurance requirement, they may end up receiving a reduced payout, reflecting both their underinsurance and the penalty applied due to the insufficient coverage.

This process discourages underinsurance and encourages policyholders to adequately cover the full value of their property, fostering responsible risk