How is the Coinsurance Penalty calculated?

The calculation of the coinsurance penalty is based on the relationship between the amount of insurance carried on a property and the amount of insurance that should be in place given its value. For coinsurance to work effectively, the policyholder must insure the property to a specified percentage of its value, often set at 80%, 90%, or 100%.

The formula provided in the selected answer effectively compares the actual amount of insurance to the amount that is required. By placing the actual amount of insurance over the required amount and multiplying it by the loss, you determine how much the insurance company will cover in the event of a claim. This calculation reveals how much the insured is penalized due to underinsuring the property.

The subtraction of the deductible is also a crucial component of this formula, as it reflects the amount the insured is responsible for before the insurance applies. Thus, the chosen answer accurately captures both the ratio for determining coverage based on coinsurance and the necessity to account for deductibles, which is essential for assessing the final payout after a loss occurs.