What is the primary purpose of the Co-Insurance Clause in commercial property insurance?

The primary purpose of the Co-Insurance Clause in commercial property insurance is to limit claims payments for underinsurance. This clause is designed to encourage policyholders to insure their properties for a value close to their actual replacement cost. When a property is insured for less than the required percentage of its value (commonly 80%, 90%, or 100%, depending on the terms of the policy), a penalty is applied to the claim payment in the event of a loss.

This means that if a policyholder suffers a loss and the property is underinsured, the insurer will calculate the claim payout based on the ratio of the actual amount of insurance carried to the amount of insurance that should have been in place according to the co-insurance requirement. As a result, policyholders are motivated to properly assess and insure their property to avoid receiving a reduced claim payment.

The other options, while related to aspects of insurance, do not accurately capture the primary function of the Co-Insurance Clause. Enhancing coverage for partial losses or allowing for updated property valuations are not the main objectives of this clause. Likewise, increasing the deductible amount does not pertain to the purpose of co-insurance, which focuses specifically on the level of insurance coverage relative to property value.