What does the coinsurance formula determine in relation to insurance payouts?

The coinsurance formula specifically addresses the relationship between the amount of insurance purchased and the actual value of the property insured, as related to insurance payouts. This concept is critical in determining the compensation a policyholder is entitled to in the event of a loss.

Under the coinsurance clause, if a property is insured for less than a stipulated percentage of its actual cash value, the insured may not receive the full amount of their claim. Instead, the payout is contingent upon the ratio of the amount of insurance carried to the amount that should have been carried, based on the coinsurance requirement.

For instance, if a property is valued at $100,000 and the coinsurance requirement is 80%, the policyholder would need to maintain at least $80,000 in coverage. If they only have $60,000 in coverage and incur a loss, their payout would be reduced because they did not meet the coinsurance requirement, thus determining the payout based on the insured value versus the required level of coverage. This methodology ensures that insured parties are adequately covered and discourages underinsurance.

In regard to the other options: while the percentage of coverage needed for full policy benefits and the deductible amount are related concepts, they do not directly pertain to