So how do we Define Coinsurance?
Coinsurance in a commercial property policy does not come into affect/play until a loss occurs. When this event/loss happens, the replacement cost is assessed at the time of the loss to determine the limit of insurance that should be in place. Depending on the coinsurance percentage selected in the policy, an insured may only have to cover up to a certain amount to avoid a coinsurance penalty.
How does Coinsurance Work?
Let’s say you have a building that you believe would cost $100,000 to replace and a coinsurance penalty in your policy of 80 percent. You insure the building for $80,000 thinking you have fulfilled the coinsurance clause. A fire loss causes $60,000 worth of damage so you submit a claim. Your insurance company subsequently determines that the replacement cost of the building is actually $150,000..
What is a good example of Coinsurance?
To determine how much to pay on the claim, the insurer divides the amount of insurance you purchased ($80,000) by the amount you should have purchased (80% of $150,000 or $120,000). The result (two-thirds, or $40,000) is the amount of your claim the insurer will pay.
If the building had been insured for at least $120,000, the insurer would have reimbursed you for the full amount of the loss. Coinsurance can be tricky and potentially cost you a ton of money if you under insure your property.