What is a coinsurance clause?

A coinsurance clause in a homeowner's policy requires you to insure your home for at least a certain percentage of its replacement cost, typically 80 percent. If you insure for less than that percentage, the insurer will reduce your claim payment proportionally. For example, if your home costs $500,000 to rebuild but you only insure it for $300,000 (60 percent), the insurer may only pay a fraction of your claim. Review your dwelling coverage limit annually and adjust it for inflation and home improvements to avoid a coinsurance penalty.