What is the main purpose of the Co-Insurance Clause in commercial property insurance?

The main purpose of the Co-Insurance Clause in commercial property insurance is to limit claims payment after partial losses. This clause encourages policyholders to insure their property at a certain percentage of its total value. If the property is underinsured at the time of a loss, the insurer will reduce the claim payment based on the ratio of the amount insured to the required amount.

For example, if a property valued at $1,000,000 is only insured for $800,000 and the Co-Insurance requirement is 80%, the insurer may apply a penalty to the claim payment for partial losses. This means that instead of receiving a full payout for the loss, the policyholder might only receive a fraction of what they would expect, based on how much the property was insured for compared to its actual value. The Co-Insurance Clause therefore serves to ensure that policyholders maintain adequate insurance coverage relative to the value of the insured property.

This mechanism encourages property owners to assess and insure their property accurately, promoting responsibility in risk management within the insurance framework.