What Is the Coinsurance Formula?
The coinsurance formula is thehomeowner's insurance formula that determines the amount of reimbursem*nt that a homeowner will receive from a claim. The coinsurance formula becomes effective when a homeowner fails to maintain coverage of at least 80%of the home's replacement value. Those who are in this situation who file a claim will only receive partial reimbursem*nt according to the formula.
Key Takeaways:
- The coinsurance formula determines the amount of reimbursem*nt that a homeowner or property owner will receive from a claim.
- The coinsurance formula is applied when a property owner fails to maintain coverage of at least 80%of the home's replacement value.
- If a property ownerinsures for less than the amountrequired by the coinsurance clause, they are essentially agreeing to retain part of the risk.
- In this case, the owner becomesa "co-insurer"and will share any loss with the insurance company according to the coinsurance formula.
How the Coinsurance Formula Works
The coinsurance formula is relatively simple. Begin by dividing the actual amount of coverage on the house by the amount that should have been carried (80% of the replacement value). Then, multiply this amount by the amount of the loss, and this will give you the amount of the reimbursem*nt.If this reimbursem*nt value is greater than the specified limits of a single insurance company, a secondary coinsurer will supply the remaining funds.
Coinsurance is a clause used in insurance contracts by insurance companies on property insurance policiessuch as buildings. This clause ensurespolicyholders insure their property to an appropriate value and that the insurer receives a fair premium for the risk. Coinsurance is usually expressed as a percentage. Most coinsuranceclauses require policyholders to insure to 80, 90, or 100%of a property's actual value. For instance, a building valued at $1,000,000 replacement value with a coinsurance clause of 90%must be insured for no less than $900,000. The same building with an 80%coinsurance clause must be insured for no less than $800,000.
If a property ownerinsures a property for less than the amountrequired by the coinsurance clause, they becomea "co-insurer"and will share the loss with the insurance company.
Real-World Use of the Coinsurance Formula
If a property ownerinsures for less than the amountrequired by the coinsurance clause, they are essentially agreeing to retain part of the risk. Thus, they becomea "co-insurer"and will share the loss with the insurance company according to the coinsurance formula.
Here are two examples that demonstrate how the coinsuranceclause works:
Building Value $1,000,000
Coinsurance Requirement 90%
Required Amount of Insurance $900,000
Actual Amount of Insurance $600,000
Amount of Loss $300,000
The coinsurance formula is:
(Actual Amount of Insurance)XAmount of Loss = Amount of Claim
(Required Amount of Insurance)
Inserting the amounts above in the formula produces the following calculation:
($600,000)X$300,000=$200,000
($900,000)
So, in this situation, the owner absorbs a $100,000 coinsurance penalty since they retained one-third of the riskrather than transfer it to the insurer. Therefore, the ownerabsorbs one-third of the loss.If the building had been insured to the amount required by thecoinsurance clause (in this case, 90%),the coinsurance calculation would look like this:
(Actual Amount of Insurance)XAmount of Loss = Amount of Claim
(Required Amount of Insurance)
($900,000)X$300,000=$300,000
($900,000)
In the second example, since the owner met the coinsurance requirement, they are not a co-insurer, and the claim is paid without penalty.
Coinsurance clauses are also found in business interruption policies. These clauses ensure that policyholders insure their revenue stream to an appropriate value.
FAQs
Coinsurance is usually expressed as a percentage. Most coinsurance clauses require policyholders to insure 80, 90, or 100% of a property's actual value. For instance, a building valued at $1,000,000 replacement value with a coinsurance clause of 90% must be insured for no less than $900,000.
What is an example of coinsurance formula? ›
In this example the coinsurance penalty would be as follows: $500,000/ $800,000= . 625 x $100,000 loss less the $5,000 deductible= $57,500 as the amount of claim actually paid by the insurance company.
What is the easiest way to explain coinsurance? ›
Coinsurance is an insured individual's share of the costs of a covered expense (it usually applies to health-care insurance). It is expressed as a percentage. If you have a "30% coinsurance" policy, it means that, when you have a medical bill, you are responsible for 30% of it. Your health plan pays the remaining 70%.
How is coinsurance calculated? ›
Example of coinsurance with high medical costs
Allowable costs are $12,000. You'd pay all of the first $3,000 (your deductible). You'll pay 20% of the remaining $9,000, or $1,800 (your coinsurance). So your total out-of-pocket costs would be $4,800 — your $3,000 deductible plus your $1,800 coinsurance.
What is coinsurance for homeowners insurance? ›
BlogInsurance. The coinsurance clause of your homeowners policy requires you to carry coverage of at least 80 percent of your home's total value if you want to receive full replacement cost for any losses—partial or full—you suffer.
What is a real life example of coinsurance? ›
For example, you might have a $20 copay for a non-preventative doctor visit, meaning you pay $20 regardless if the total cost for the visit is $100 or $300. However, a 20% coinsurance fee would vary depending on the cost of the service.
What is an example of 80 20 coinsurance? ›
With 20% coinsurance, you pay 20% of the expense while the insurer pays 80%. That means for the next $25,000 in covered medical expense, you pay $5,000 and your insurer pays $20,000. Once you've paid your $1,000 deductible and $5,000 in coinsurance, you've reached your $6,000 out-of-pocket maximum for the year.
What is a good coinsurance percentage? ›
While the 80/20 division is most common, you might also find options like: The insured pays 40%, while the insurance plan covers 60% The insured pays 30%, while the insurance plan covers 70%
What is the 80% rule for coinsurance? ›
The 80% rule means that an insurance company will pay the replacement cost of damage to a home as long as the owner has purchased coverage equal to at least 80% of the home's total replacement value.
What does 20% after coinsurance mean? ›
A 20% coinsurance means your insurance company will pay for 80% of the total cost of the service, and you are responsible for paying the remaining 20%. Coinsurance can apply to office visits, special procedures, and medications.
Coinsurance is a portion of the medical cost you pay after your deductible has been met. Coinsurance is a way of saying that you and your insurance carrier each pay a share of eligible costs that add up to 100 percent. The higher your coinsurance percentage, the higher your share of the cost is.
Does coinsurance apply to actual cash value? ›
If the insured purchases insurance at least equal to the coinsurance percentage (say 80 percent), the insurer pays the full value of any loss (either replacement cost or actual cash value, depending on what the insured has purchased), less the deductible, up to the limit of insurance.
Does coinsurance apply to total loss? ›
Coinsurance as it applies to Property Insurance. Because most property losses are partial and not total losses, the average insured will take advantage of this tendency and only insure enough to cover a partial loss.
What is 20% of my coinsurance? ›
A 20% coinsurance means your insurance company will pay for 80% of the total cost of the service, and you are responsible for paying the remaining 20%. Coinsurance can apply to office visits, special procedures, and medications.
What is an example of 100 coinsurance? ›
Continuing with the previous example, let's say you have a 100 percent coinsurance clause on a $100,000 property, but you only get $50,000 in coverage. Then you experience a $50,000 loss, and you file a claim. Because your loss is equal to your limit, you may expect a full payout of $50,000.
Is the coinsurance formula applied to total losses? ›
Coinsurance as it applies to Property Insurance. Because most property losses are partial and not total losses, the average insured will take advantage of this tendency and only insure enough to cover a partial loss.
What does 75% coinsurance mean? ›
Coinsurance is a percentage of a medical charge you pay, with the rest paid by your health insurance plan, which typically applies after your deductible has been met. For example, if you have 20% coinsurance, you pay 20% of each medical bill, and your health insurance will cover 80%.
