In the context of insurance, what does the term "co-insurance" refer to?

The term "co-insurance" refers to the requirement for the insured to share in the payout of a covered loss. This concept generally involves the policyholder being responsible for a certain percentage of the insured amount in the event of a claim. It is often found in property insurance policies, where it can encourage policyholders to insure their property for a percentage of its value, thus reducing the insurer's risk and aligning the interests of the insurer and the insured.

In this context, co-insurance effectively incentivizes policyholders to maintain appropriate coverage levels. For instance, if a property is insured below its actual value and a claim occurs, the insured might have to bear a proportion of the loss based on the level of coverage they maintained. This mechanism helps ensure that policyholders are mindful of their coverage limits and deter under-insurance. Understanding co-insurance is essential in determining how claims will be paid and the financial responsibilities of both insureds and insurers.