Coinsurance refers to the bargain between commercial property owners and the insurance industry. This clause in property policies encourages the property owner to gauge coverage needs by possible, not probable, maximum loss. With $1 million at risk but a probable maximum loss of $100,000, for example, the property owner would probably buy $100,000 insurance and bank on avoiding the larger disaster. The bargain offered by the insurance industry is a reduced rate per $100 of coverage if the owner agrees to buy coverage at a specified relation (80 percent commonly) to value (to possible maximum loss in other words). If the insured accepts the bargain but events prove the amount of insurance is inadequate to the stated coinsurance percentage, the insured becomes coinsurer in the same ratio as the amount of insurance bears to the amount that should have been carried. In major medical insurance, a provision by which both the insured person and insurance company in a specific ratio share the hospital and medical expenses resulting from an illness or injury.
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A clause that obligates the Insurer to pay only the proportion of any loss that the amount of Insurance purchased bears to the product of the Coinsurance percentage and the value of the insured property at the time of the loss. An indirect way to achieve the rate equity.