Registered Insurance Brokers of Ontario (RIBO) Practice Exam

Which statement is true regarding insurance co-insurance clauses?

1. They guarantee full replacement value

2. They reduce the deductible amount

3. They require property to be insured for a specified percentage of its value

4. They are optional for all policies

The correct answer is: They require property to be insured for a specified percentage of its value

The correct choice regarding insurance co-insurance clauses is that they require property to be insured for a specified percentage of its value. Co-insurance is a risk management feature found primarily in property insurance policies. It typically stipulates that the insured must cover a certain percentage, often 80%, 90%, or 100%, of the property's total value. If the insured fails to meet this requirement at the time of a loss, they may incur a penalty in terms of the claim payout. This principle is designed to encourage policyholders to adequately insure their properties to reflect their actual value and to share some responsibility for the risk of loss. If insured at less than the required percentage, the insurer can reduce the claim amount accordingly, penalizing the insured for underinsurance. Other options do not accurately reflect the nature of co-insurance. For instance, co-insurance does not guarantee full replacement value nor does it typically reduce the deductible amount. Moreover, co-insurance clauses are not optional for all policies; many commercial property policies incorporate these clauses as a standard requirement to maintain adequate coverage levels.