What is the purpose of the coinsurance provision in Business Income Coverage?

The purpose of the coinsurance provision in Business Income Coverage is to ensure adequate coverage for losses. Coinsurance requires that the policyholder insure their property for a certain percentage of its total value, typically around 80%, 90%, or 100%. This provision incentivizes the insured to adequately cover their business assets, as failing to do so can result in a penalty when a claim is made.

If the insured does not meet the coinsurance requirement at the time of loss, any claim payment may be reduced in proportion to the amount of insurance they maintained versus the amount they should have carried. This design aims to prevent underinsurance, which could lead to significant financial strain for a business in the event of a loss, ensuring that policyholders have sufficient coverage to recover from their losses effectively.