What is the formula used for the coinsurance penalty?

The correct choice indicates that the formula for calculating the coinsurance penalty is based on the ratio of insurance carried to the insurance required. In a coinsurance situation, insurers typically require that policyholders maintain coverage at a specified percentage of the property’s total value, often 80%, 90%, or sometimes 100%. This concept is designed to encourage policyholders to insure their property for its full value.

When assessing a claim, the insurer compares how much coverage the policyholder actually carried (insurance carried) against the amount they should have had in place (insurance required). The ratio from this comparison directly impacts the amount of the penalty that may be applied if the policyholder is underinsured at the time of the loss.

If the ratio of insurance carried to insurance required is below the stipulated coinsurance percentage, the policyholder may not receive the full amount of the loss—leading to a coinsurance penalty. Therefore, the underlying principle is that the policyholder must maintain sufficient coverage to avoid penalties on their claims.

Ultimately, this formula emphasizes the importance of ensuring that the insurance coverage remains aligned with the actual value of the property to prevent financial losses in case of a claim due to underinsurance.