Registered Insurance Brokers of Ontario (RIBO) Practice Exam

What effect does a 90% coinsurance clause have on an insured property?

1. Limits the insurer's payment

2. Encourages underinsurance

3. Encourages policyholders to insure for full value

4. Reduces premiums

The correct answer is: Encourages policyholders to insure for full value

A 90% coinsurance clause is designed to encourage policyholders to insure their property for its full value. The purpose of this clause is to ensure that the insured maintains a certain level of coverage proportional to the actual value of the property. If the property is underinsured, the insured may face a penalty when making a claim. This mechanism serves not only to protect the insurer from significant losses due to underinsurance but also motivates policyholders to evaluate and maintain appropriate coverage. By requiring 90% coverage, the insurer is incentivizing policyholders to assess their property’s worth and to purchase policies that reflect that value, thereby reducing the risk of substantial financial loss in the event of a claim. This practice ensures a fair distribution of risk and aligns the interests of both the insurer and the insured. The other options do not accurately reflect the primary intent or effect of the clause. For instance, limiting the insurer's payment or encouraging underinsurance are contrary to the goals of the coinsurance provision, while reducing premiums is not associated with the requirement to maintain a specific coverage amount.