What triggers the coinsurance penalty in business income coverage?

• A. If the insured's limit of insurance is less than the amount required by the coinsurance clause
• B. If the insured files a claim late
• C. If extra expenses exceed the limit
• D. If the property is repaired quickly

Answer: (A)

Coinsurance penalty in business income coverage is triggered when the insured does not carry the amount of insurance the policy requires under the coinsurance clause. The clause sets a minimum percentage of the property’s value that must be insured. If the actual limit is less than that required amount, the insurer applies a proportional penalty and reduces the payout accordingly, based on the ratio of actual coverage to required coverage. For example, if the policy requires 80% coverage but only 60% is carried, a loss will be paid at a reduced rate reflecting that underinsurance. Filing late, exceeding limits for extra expenses, or rapid repairs do not cause this penalty—the issue is underinsurance relative to what the clause requires.