On the Economic Advantages of the Coinsurance Clause

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The coinsurance clause is a widespread rule in insurance (e.g., in commercial insurance, homeowners insurance, and other personal lines). It states that if a property is underinsured, the insurer is responsible only for that portion of the loss that the amount of insurance bears to the value of the asset. The purpose of this article is to point out an important advantage of the coinsurance clause, previously neglected in the literature. It is shown that all risk averse insureds will prefer an insurance contract with a coinsurance clause over a contract without a coinsurance clause of the same actuarial value.