What does the Co-insurance Average or Contribution Clause indicate regarding penalties for the insured?

The Co-insurance Average or Contribution Clause serves to encourage policyholders to insure their property for its full value. When this clause is in effect, if the insured underinsures the property (meaning they have chosen a coverage amount lower than the actual value), they may face penalties in the event of a loss. The penalties manifest as reduced compensation based on the extent of underinsurance.

For instance, if a property worth $100,000 is insured for only $70,000, and a loss occurs, the payout would be calculated based on the ratio of insurance carried to the value of the property. Therefore, if a claim is made for $20,000, the insured may only receive a proportionate amount based on the coverage they purchased, effectively penalizing them for not carrying adequate insurance.

This mechanism ensures that insured parties are aware of the importance of insuring their assets sufficiently, hence creating consequences (penalties) under specific circumstances when they fail to do so. The nuances of this clause emphasize the necessity for accurate and full disclosure of the property's value during the policy procurement process.