Which type of property insurance might impose a coinsurance penalty?

Coinsurance is a provision commonly associated with property insurance that requires the insured to carry a minimum amount of coverage to avoid penalties in the event of a loss. In this context, commercial property insurance frequently includes a coinsurance clause, which stipulates that if the insured does not maintain a certain percentage of the property's value in coverage (often 80%, 90%, or 100%), they may be penalized on any claim by a proportionate reduction in the payout.

This clauses serves as a way to encourage policyholders to insure their properties to a value that accurately reflects their actual worth. If a policyholder underinsures their property and subsequently files a claim, the insurance company may adjust the claim payout based on the disparity between the insured amount and the required minimum coverage, leading to a coinsurance penalty.

Dwelling insurance can also have coinsurance requirements, but it is less prevalent than in commercial policies. Automobile and life insurance typically do not involve coinsurance clauses in their coverage agreements, focusing instead on specific payouts for covered events without penalties related to policy value. Thus, commercial property insurance is the most fitting answer for this question regarding coinsurance penalties.