Coinsurance Explained
Most property insurance policies contain a coinsurance provision. A coinsurance provision requires the insured to insure the covered property to a specified percentage of it’s full value, typically 80, 90 or 100 percent. If there is a loss, and the limits purchased are less than what is required by the coinsurance clause, the loss recovery will be limited to that same percentage of loss as the ratio of insurance amount carried to the insurance amount.
Have you ever wondered what the coinsurance clause on your policy means?
Coinsurance may well be one of the most confusing and misunderstood terms in insurance.
Coinsurance is the percentage of value that the policyholder is required to insurance If you insure your property for less than that amount your insurance company imposes a “coinsurance penalty” once a claim is filed. The value is determined at the time of the loss and if the amount of insurance is found to under the stated coinsurance percentage then a penalty is applied reducing the claim payment.
According to the independent Insurance Agents of America, most business policies include a “coinsurance” clause, determining what percentage of the value of your property must be insured in order to be fully reimbursed for a loss.
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.