Which formula is used to calculate the coinsurance penalty?

The correct formula used to calculate the coinsurance penalty is based on the relationship between the amount of insurance actually carried and the amount of insurance that is required based on the property's value. This formula compares how much insurance a policyholder has against the amount they should have in order to avoid a penalty during a claim.

This penalty is triggered when a property owner does not insure their property to a certain percentage of its value, which is often set at 80% or more. The formula—(Insurance Carried / Insurance Required) x Loss Amount—determines how much of the claim will be paid versus how much the property owner will be penalized for not having adequate coverage.

The insurance carried is the amount of coverage that the policyholder has purchased, while the insurance required is generally a percentage of the property's value. During a loss, if the insurance carried is less than the required insurance, the payout will be adjusted by this formula, effectively penalizing the insured for underinsuring their property. This encourages property owners to properly insure their properties and helps to ensure that insurers are not unduly burdened with losses from underinsured claims.