How is a typical damages amount calculated if a policyholder is underinsured based on coinsurance?

A typical damages amount in the context of coinsurance is calculated by applying the coinsurance percentage to the loss. Coinsurance is a provision in property insurance policies that requires the insured to carry a certain percentage of the property's value in coverage. If the amount of coverage is less than the required coinsurance amount, the insurer will reduce the payout based on the proportion of underinsurance.

In essence, if a policyholder has a loss and their coverage is inadequate according to the coinsurance clause, the insurer will calculate the amount payable by taking the actual loss and multiplying it by the ratio of the insurance carried to the insurance that should have been carried. This ensures that the payout reflects the degree of coverage relative to the actual value of the property, promoting a fair assessment of the loss in the context of the policyholder’s decisions regarding coverage limits.

This method of calculation directly supports the purpose of coinsurance, which is to encourage policyholders to insure their property to a level that reflects its actual value, thus minimizing their financial loss in the event of a claim.