What term refers to the requirement that the insured carry a specific amount of insurance pertaining to replacement cost?

• A. Coinsurance
• B. Liberalization
• C. Subrogation
• D. Arbitration

Answer: (A)

Coinsurance is the rule that the insured must carry insurance equal to a stated percentage of the property's replacement cost. This clause motivates the policyholder to insure to value; if they don’t, the insurer reduces the claim payout proportionally to the degree of underinsurance. For example, if the replacement cost is 200,000 and the coinsurance requirement is 80%, the minimum coverage should be 160,000. If you carry 160,000 or more, you can receive the full payment up to your policy limit for a covered loss (subject to the deductible). If you only carry 100,000, a loss of 50,000 would be paid at 100,000/160,000 of the loss, or 31,250, illustrating how underinsuring lowers the recovery.

Liberalization, subrogation, and arbitration relate to different concepts: liberalization refers to expanded coverage without additional premium, subrogation is the insurer’s right to recover costs from a third party after paying a claim, and arbitration is a method to settle disputes.