CoInsurance has different meanings in health insurance and property insurance so for this blog we’re going to stick to talking about property insurance.
So coinsurance is basically how insurance companies make sure that you are insuring your property to close to what it costs to rebuild it or replace it.
It’s called CoInsurance because it describes what happen if your property is NOT insured to it’s correct value, you will become responsible for a portion of the claim. Basically you’ll become a Co-Insurer.
Coinsurance / Co-Insurer
All property policies have coinsurance whether it’s built into the coverage like Homeowners insurance or specifically described like on a commercial property insurance policy.
The coinsurance is described by a percentage of the value to rebuild the building or to replace your contents. Usually 80%, 90% or 100% So if you have 80% CoInsurance then you have to insure at least 80% of your building or contents.
If you don’t insure your property to the correct CoInsurance percentage then the company will deduct from the claim the same percentage you were underinsured.
One percentage is the amount you promise to insurance, for example if you have a building that costs $100,000 to rebuild and you have an 80% CoInsurance clause then you promise to insure at least $80,000.
The other percentage is the amount the company would deduct from the claim because you were under insured. Figuring out the percentage they’ll deduct, also called the penalty,requires a little math. It’s a formula. You take the amount that you insured and divide it by the amount you should have insured and then multiply it by the amount of the loss. The answer is the amount the carrier will pay, (keep in mind that they will also subtract the deductible from the answer). The difference between what the loss was and what the carrier will pay (before the deductible) is the CoInsurance penalty.
So a quick word problem. You have a building that has a replacement value of $125,000, with 80% Coinsurance which means you have to insure $100,000 but you only insure $80,000 and you have a $10,000 loss. 80,000 divided by 100,000 equal .80. You multiply the loss 10,000 by .8 which tells you that the carrier will pay $8,000 minus whatever your deductible is. Your CoInsurance penalty is $2,000.
Simply put the company will deduct from the loss whatever percentage you were under insured. In the example you were underinsured by 20% so they deduct 20% from the loss.
If you’re like me you are wondering why does property insurance work this way. Why can’t I just insure what ever value I want without penalty.
The answer has to do with the statistics that the carriers use to try to figure out how likely property is to have a loss. Basically, it’s much more likely to have a $100,000 loss on a $1,000,000 property than it is to have a $100,000 loss on a $100,000 property. So the companies use CoInsurance to make sure that they are collecting enough premium to make sure they have enough money to pay the likely claims they will have in a given year.
It pays to make sure that you have your property insured to the correct amounts so that you get the loss paid the way you expect when it matters most. You can make sure that you are insuring to value by having a replacement cost appraisal performed on your building or having an updated list of your stock and equipment with the values you paid for them.
Keep in mind that NOT all insurance is created equal.
This was a very broad and general explanation of how Coinsurance works on property insurance policies but some policies have endorsements that can either take away even more coverage or add coverage. No matter what you may see on TV or internet ads, all policies are NOT the same. You should spend some time with your independent insurance agent to discuss your coverage and make sure that the insurance coverage you want to have is what would be covered on your Property insurance policy. If you don’t have an independent agent or would like a second opinion feel free to call, chat or email us and we would be glad to discuss your needs and/or policy with you.