What is a coinsurance penalty?

A coinsurance penalty occurs when an insured property is underinsured, meaning that the insurance coverage is less than a specified percentage of the property's actual value, which is generally stated in the insurance policy. When a loss occurs, the insurer may apply a coinsurance penalty, resulting in a reduction of the claim payment based on the proportion of underinsurance.

This mechanism is designed to encourage policyholders to insure their property at adequate levels. For example, if a policy requires 80% coinsurance and a property is only insured for 60% of its value, the insurer can penalize the claim by only paying out a portion of the loss, reflecting the actual coverage provided. This link between the amount insured and the potential claim payment is a critical aspect of understanding property insurance and risk management.

The other choices do not accurately reflect the nature of a coinsurance penalty. Filing fees and late premium payments are unrelated to the insured property's value and coverage adequacy. An excessive coverage surcharge typically refers to different policy stipulations rather than addressing underinsurance, which is the focus of the coinsurance penalty.