Ask ten people “what’s coinsurance?” and you’ll probably get ten different answers. Coinsurance is a pretty common term and it’s used in connection to all sorts of insurance policies. Health insurance, small business insurance, and homeowner’s insurance all have a coinsurance clause. However, the way coinsurance impacts your coverage varies depending on the type of plan.
Breaking Down the Coinsurance Clause
A coinsurance clause forces the property owner to get insurance that’s equal to or greater than the policy’s coinsurance percentage.
Basically, a coinsurance clause is a way for the insurance company to discourage you from taking out a cheap, low coverage homeowner’s policy on a pricey home just to save some premium dollars.
If you decide it is better to save on premium and just ignore the coinsurance clause, then expect to get less of a claim payout should you have a future loss.
For example, you can’t buy $200,000 property insurance coverage for a $300,000 home. Here’s why: if someday down the road you need $300,000 in total replacement costs then the coinsurance clause will come into play and end-up hitting you with a penalty because your property was underinsured.
On the other hand, if you have the correct amount of insurance on your home then you’ll get the full amount of replacement costs to repair or rebuild your property.
The Coinsurance Clause Formula
Each insurance company has their own coinsurance formula so you have to check with your own property carrier to know the exact calculation they use.
Typically, a home insurer will figure the policy limits, risk value, covered loss amount, and the coinsurance percentage listed in the policy terms.
Coinsurance Clause Example A
In this example, the homeowner has the right amount of coverage and so there’s no worries about the coinsurance clause.
Replacement Value of Property | $1,000,000 |
Coinsurance requirement | 80% |
Minimum coinsurance limit | $800,000 |
Actual policy limit | $2,000,000 |
Reported loss | $500,000 |
Coinsurance penalty | $0 |
Less deductible | ($5,000) |
Net insurance recovery | $495,000 |
Coinsurance Clause Example B
In this example, the homeowner doesn’t have the right amount of property coverage and so the coinsurance clause reduces their total claims payout
Replacement Value of Property | $1,000,000 |
Coinsurance requirement | 80% |
Minimum coinsurance limit | $800,000 |
Actual policy limit | $600,000 |
Reported loss | $400,000 |
Potential coinsurance penalty | $100,000 |
Less deductible | ($5,000) |
Net insurance recovery | $295,000 |
Call Gonzalez & Co right away to make sure your property insurance is sufficient and offers the best coverage for your needs. Get a quote or talk to an agent.