South Dakota Crop Insurance Practice Exam

What insurance policy condition requires the insured to share in the loss?

1. Deductible

2. Coinsurance

3. Capped insurance

4. Limit of liability

The correct answer is: Coinsurance

Coinsurance is a policy condition that requires the insured to share in the loss, typically by maintaining a certain percentage of coverage relative to the actual value of the property being insured. This concept is crucial in crop insurance because it encourages policyholders to insure their crops to an adequate level rather than underinsuring them. For example, if a farmer has a crop insurance policy with a coinsurance requirement of 80% and only insures their crop for 70% of its value, they may bear a portion of any loss they incur. Essentially, if their loss exceeds the limit of their insurance coverage, they will be responsible for covering the shortfall. This mechanism helps to mitigate moral hazard by encouraging insured parties to accurately assess and insure their value. This condition operates independently of other terms like deductibles, which determine the amount the insured must initially bear before the insurance policy kicks in, or limits of liability, which set caps on the maximum an insurer will pay for a loss. Capped insurance, while a concept that might appear in discussions about policy limits, does not directly relate to the sharing of losses in the way coinsurance does.