What is required to avoid penalties under the loss settlement clause?

To avoid penalties under the loss settlement clause, it is necessary to hold more than 80% of the property's value. This specific requirement is often referred to as the "coinsurance clause" in property insurance policies. When a property owner insures their property for at least 80% of its value, they are generally protected from penalties that could lead to a reduced payout in the event of a covered loss.

The reason why holding more than 80% of the property's value is critical is that it ensures adequate coverage against potential loss. If less than this threshold is maintained, the insurer may apply a penalty that reduces the amount of the claim payout in the event of a total loss, reflecting the proportion of the total value that was insured compared to the actual replacement or repair costs.

While options discussing insuring the total value, paying for replacement cost insurance, and filing claims promptly are relevant to property insurance, they do not specifically address the fundamental requirement of the loss settlement clause concerning the coverage amount in relation to the property’s value. Thus, maintaining coverage that meets or exceeds the 80% threshold directly safeguards the insured against financial penalties imposed at the time of loss settlement.