What occurs if a policy experiences overinsurance?

When a policy experiences overinsurance, it means that the coverage amount exceeds the actual value of the insured asset. In this scenario, the insurer will generally pay only up to the insurable value of the asset, which is determined based on its actual market value or replacement cost. This principle is rooted in the insurance concept of indemnity, which aims to put the insured in the same financial position after a loss as they were before the loss, without allowing for a profit through insurance.

For instance, if a building is valued at $200,000 but is insured for $300,000, the policyholder cannot claim and receive $300,000 in the event of a loss. Instead, the insurer will honor the limit of liability or the actual value, which in this case is $200,000. This ensures fairness within the insurance system and prevents insurers from having to pay more than the actual loss incurred.

In contrast, the other options do not correctly address the consequences of overinsurance. The insured is not entitled to additional compensation above the insurable value, coverage does not get automatically canceled, and the policy is not transferred to a different insurer as a result of overinsurance.