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Simple English definitions for legal terms
contribution clause
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A quick definition of contribution clause:
Contribution Clause: This is a term that refers to a clause in an insurance policy that is also known as the coinsurance clause. It means that if you have more than one insurance policy covering the same risk, each policy will pay a portion of the claim. The contribution clause ensures that the policyholder does not receive more than the actual amount of the loss.
A more thorough explanation:
A contribution clause is a provision in an insurance policy that requires the policyholder to share in the cost of a claim if they are underinsured. This clause is also known as a coinsurance clause.
For example, let's say a homeowner has a property insurance policy with a 90% coinsurance clause. The policy has a limit of $200,000 for the home's replacement cost. If the homeowner only insures the home for $150,000, they are underinsured by 25%. If the home sustains $50,000 in damages, the homeowner would be responsible for paying 25% of the claim, or $12,500, out of pocket.
The contribution clause is designed to encourage policyholders to insure their property for its full value, so that they are not left with a large financial burden in the event of a claim.