West Virginia Property and Casualty Licensing Practice Exam

What is indicated when a policy reverts back to the coinsurance clause?

1. The policy limits are reduced

2. The insured is underinsured

3. The premium is refunded

4. The coverage is canceled

The correct answer is: The insured is underinsured

When a policy reverts back to the coinsurance clause, it indicates that the insured is underinsured. In property insurance, the coinsurance clause is designed to encourage the policyholder to insure their property to a specified percentage of its actual value (commonly 80%, 90%, or 100%). If the policyholder fails to meet this minimum requirement, they may face a penalty in the event of a loss, which comes in the form of a reduced payout based on the ratio of the insured amount to the required amount. When the policy reverts to operating under the terms of the coinsurance clause, it indicates the insured amount is inadequate compared to the property’s actual value. This situation signifies that if a loss occurs, the insured may have to bear a significant portion of the loss due to the underinsurance. The other options do not accurately reflect what occurs when the coinsurance clause is activated. There is no direct implication that the policy limits are changed immediately, or that a premium refund is granted, or the coverage is canceled solely based on this clause reverting. Thus, the correct answer aligns with the concept of underinsurance encapsulated within the framework of the coinsurance clause.