The Confusion of Coinsurance

Coinsurance is a flexible term, as it applies to many different policies, all in different ways. This article specifically discusses how the coinsurance clause works in property insurance, and this article uses a Homeowner’s policy to illustrate exactly how the Coinsurance clause would affect you in the event of a claim involving your home.

A Coinsurance clause can be found in nearly every property-covering insurance policy you can find. Coinsurance was created to make sure the insured was properly valuing their building/property. Coinsurance applies to both Replacement Cost and Actual Cash Value loss settlements.

How does the Coinsurance clause require property to be properly valued? 

The Coinsurance clause will require the property to be insured for a certain percentage of its total Actual Cash Value/Replacement Cost value. Typically, the Coinsurance percentage will be 80%, but can be more or less than that. So if the Coinsurance percentage is 80%, but a piece of property is insured for less than 80%, there will be a penalty applied to the claim settlement. So let's say your home's full Replacement Cost value is $200K, you can have it insured for $160K and still have no penalty (200,000 x .8 = 160,000). Note that if you did only have it insured for $160K, you would only receive $160K, not the full $200K. The optimistic view of the Coinsurance percentage is that the 80% Coinsurance allows for a 20% 'buffer zone' for valuation errors, inflation, market shifts, and other factors. 

How exactly is the penalty calculated?

Typically, the penalty is calculated by taking the amount that the property was insured for and dividing it by what it should have been insured for. The resulting fraction is then multiplied to the total claim/loss amount. The number calculated is the amount you will be receiving. 

Example: Home w/RC value of $200K, subject to 80% Coinsurance, insured for $150K at RC.

Insured for: $150,000
Should have been insured for: $160,000
Loss amount: $50,000
Amount paid to insured: $46,875
Penalty Amount: $3,125


The Bottom Line

If you don't have your property properly insured, come claim time, you might not be able to fully rebuild your house using the insurance money, or you may be forced to rebuild smaller than what you previously had!

Note from the Author (Nov. 14, 2014): After two years of work, we've entirely redesigned our website! Using SquareSpace, we were able to import this blog and we are continuing our blog there. To find the current version of this article and our new articles, click HERE.