What is the purpose of a 'coinsurance clause' in a commercial property policy?

A COINSURANCE CLAUSE in commercial property insurance requires the insured to carry insurance equal to a SPECIFIED PERCENTAGE (commonly 80%, sometimes 90% or 100%) of the property's value. If the insured is UNDERINSURED (carries less than required) at the time of a loss, a PENALTY applies — the claim payment is REDUCED proportionally. Property insurance/commercial. FORMULA: (amount carried ÷ amount required) × loss = payment (up to the limit, minus deductible). EXAMPLE: with an 80% coinsurance requirement, if you should carry $80,000 but only carry $60,000, you'd be paid 60/80 = 75% of a partial loss. PURPOSE: encourages insuring to an adequate value (insurers price assuming people insure most of the value). Knowing how the coinsurance clause works (carry the required %, or face a penalty) is important commercial property insurance knowledge.