Hawaii Insurance License Practice Exam

What does co-insurance in a property insurance policy mean?

1. The insured pays all losses under a certain amount

2. A percentage of coverage must be maintained by the insured

3. The insurer pays only the depreciation value

4. It provides unlimited coverage

The correct answer is: A percentage of coverage must be maintained by the insured

Co-insurance in a property insurance policy refers to the requirement that the insured maintains a certain percentage of coverage relative to the value of the property. This means that if a property is underinsured and a covered loss occurs, the insurance payout may be reduced based on the percentage of coverage maintained. For example, if a policy stipulates a co-insurance requirement of 80%, the property owner must have insurance coverage equal to at least 80% of the property's value. If they fail to meet this requirement, they may incur a penalty in the event of a claim, resulting in a decrease in the amount the insurer will pay for a loss. This mechanism encourages property owners to maintain adequate coverage to adequately protect their assets. The other options do not accurately capture the essence of co-insurance. The first option suggests that the insured pays all losses under a certain amount, which relates more to deductibles rather than co-insurance. The third option mentions the insurer paying only the depreciation value, which pertains to actual cash value policies rather than co-insurance. Finally, the fourth option, stating that it provides unlimited coverage, is also erroneous as co-insurance involves maintaining a required level of insurance rather than offering limitless protection.