The word coinsurance may be the most misunderstood and confusing term in commercial insurance. In property insurance, coinsurance will never result in a larger payment on a claim. It can only reduce the settlement or have no impact on it.
WHAT IS COINSURANCE?
Coinsurance is a penalty imposed on the insured by the insurance carrier for under reporting/insuring the value of your property. The penalty is based on a percentage stated within the policy and the amount under reported. As an example:
WHAT IS THE COINSURANCE PENALTY?
A building has an actual replacement value of $1,000,000 and has an 80% coinsurance clause but is insured for only $500,000. Since its insured value is less than 80% of its actual replacement cost value there will be a coinsurance penalty at the time of a loss.
Lets assume a $100,000 fire loss. The simple formula for calculating the coinsurance penalty is: amount of insurance in place / Amount of insurance that should have been in place x the loss, less any deductible is the amount actually paid. 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. The coinsurance penalty in this case is $37,500 because if the building were insured to at least 80% of its actual replacement value or $800,000 there would have been no coinsurance penalty and the insured would have collected the full $100,000 loss less their $5,000 deductible.
WHAT IS THE BEST WAY TO AVOID A COINSURANCE PENALTY
In order to make sure you never run into a coinsurance penalty it is vital to make sure that all of your property is insured to the actual replacement cost. Don’t confuse replacement cost with market value. Make sure you review your property values with your agent on an annual basis.
FAQs
Coinsurance is a property policy requirement that means you must insure your home or office to a specific value, often 80% of its replacement cost at the time of the loss. Contact us today so that we can review your current insurance and help you decide if you should increase your property limits."
What does 80% coinsurance mean for property? ›
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.
What is 100% coinsurance property? ›
The 100% coinsurance clause means you need to cover 100% of the value of your business personal property for a claim to be fully paid. If you only cover a portion of the value, the claim will not pay the full value of loss.
What is the formula for the property coinsurance penalty? ›
The simple formula for calculating the coinsurance penalty is: amount of insurance in place / Amount of insurance that should have been in place x the loss, less any deductible is the amount actually paid.
How do you explain property insurance? ›
Property insurance refers to a series of policies that offer property protection, including structural damage, theft of personal belongings, and liability coverage. Property insurance can include homeowners insurance, renters insurance, flood insurance, and earthquake insurance.
Does property 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.
Does 80 coinsurance mean I pay 80? ›
Here's an example of how coinsurance costs work: John's health plan has 80/20 coinsurance. This means that after John has met his deductible, his plan pays 80% of covered costs, and John pays 20%.
What is the 80% rule in property insurance? ›
When it comes to insuring your home, the 80% rule is an important guideline to keep in mind. This rule suggests you should insure your home for at least 80% of its total replacement cost to avoid penalties for being underinsured.
What is 100% coinsurance? ›
100% coinsurance: You're responsible for the entire bill. 0% coinsurance: You aren't responsible for any part of the bill — your insurance company will pay the entire claim.
Does coinsurance apply to personal property? ›
Coinsurance is a property insurance provision that imposes a penalty on an insured's loss recovery if the limit of insurance purchased is not at least equal to a specified percentage of the value of the insured building or business personal property.
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.
What is the coinsurance limit? ›
What Does Coinsurance Limit Mean? A coinsurance limit refers to the maximum amount the insured is required to pay out of pocket for covered medical expenses before the insurance company starts covering the full amount for the rest of the policy year.
What is property coinsurance for dummies? ›
Coinsurance is an industry-wide property provision that states the amount of coverage that must be maintained as a percentage of the total value of the property at the time of loss. The penalty is based on a percentage stated within the policy and the amount reported.
What does 80% coinsurance mean on property insurance? ›
For example, if 80% coinsurance applies to your building, the limit of insurance must be at least 80% of the building's value. If the policy limit you have selected does not meet the specified percentage, your claim payment will be reduced in proportion to the deficiency.
How do you avoid coinsurance penalty? ›
The easiest way to think about it is, if a policy aims to cover a property valued at $1,000,000 of replacement cost but there is a 90% coinsurance provision, the property must be insured for a minimum of $900,001 to avoid a coinsurance penalty at the time of the loss.
What is the purpose of putting a coinsurance provision in a property policy? ›
The definition of coinsurance includes a provision within a property insurance policy to deter business owners from underinsuring their properties. It encourages business owners to carry a reasonable amount of coverage in relation to their property's value.
What does a 20% 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.
What does it mean when a 100000 house insured on a policy with an 80% coinsurance requirement? ›
Given a 80% coinsurance requirement on a $100,000 house, the owner should have $80,000 coverage. But he has only $60,000 coverage, giving a ratio of 0.75. Hence, for a damage of $40,000, he can collect 75% of it, amounting to $30,000.
