Definition - What does Coinsurance Penalty mean?
A coinsurance penalty is the amount that the insured pays for a loss that the insurer will not cover because of insufficient coinsurance. This usually happens when the worth of the insurance bought is less than the worth of property covered.
Insuranceopedia explains Coinsurance Penalty
The formula for getting the claim in a property insurance is the actual amount of insurance divided by required amount of insurance (based on the worth of the property during the loss) and then multiplied by the amount of loss. So, if the amount paid is less than the required amount, the insurer will not be able to cover the amount of the loss. Suppose that Mr. X paid the $60,000 for a property valued at $90,000 which now needs $30,000 for repairs because of a specific peril listed in the policy.Given the computation, the insurance company would give Mr. X only $20,000. He has to use his own money ($10,000) for the rest. The $10,000 serves as the coinsurance penalty.