Understanding the Co-Insurance Clause

What Exactly Does the Co-Insurance Clause Cover According to a Business Risk Advisor.

By Brock Hostetler

A commonly misunderstood aspect of property insurance is the coinsurance clause. While many are familiar with coinsurance in health insurance, its role in property policies differs significantly and warrants a closer look.

Here are the key points to consider:

• Purpose of Coinsurance: Coinsurance serves to protect the insurer from disproportionately high payouts relative to the coverage the policyholder maintains.
• Example Without Coinsurance: Suppose your building requires $1 million for replacement, but you only carry     $500,000 in coverage. If a hailstorm causes $100,000 in damage to the roof, the insurance will cover the full claim, even with inadequate coverage, prompting the need for coinsurance.
• Example With Coinsurance: With an 80% coinsurance clause, you must insure the building for at least 80% of the total replacement cost, or $800,000. With only $500,000 in coverage, a coinsurance penalty applies. This penalty calculation involves dividing the actual coverage by the required coverage, multiplying this percentage by the loss amount, and subtracting the deductible. In this scenario, you'd receive $62,500 less the deductible to cover the roof claim.
• Avoiding Coinsurance Issues:     Collaborate with an insurance risk advisor knowledgeable in coinsurance, ensure adequate coverage based on replacement cost, and consider adding an agreed value endorsement to waive the coinsurance clause for added peace of mind.

Understanding and effectively addressing coinsurance clauses can prevent costly surprises during claim settlements. Consulting with experienced professionals and assessing coverage adequacy are essential steps toward securing comprehensive protection for your property.

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