Understanding Coinsurance

By on June 5, 2013

Taking the time to understand your insurance policies is well worth the effort. An insurance policy is a complex contract that often contains provisions that assigns certain responsibilities to the policyholder, such as a coinsurance clause.

What is coinsurance?

Coinsurance is a term used in more than one context when it comes to the realm of insurance. The definition of coinsurance varies depending on the type of insurance. Most of us know coinsurance in regards to our health insurance, however, coinsurance may come into play with your Property Insurance policy for a business structure.

Insurance attached to a business’ structure, facilities, or office building must be adequate in order to cover a total loss. If a business owner does not adequately insure a business structure and a claim is made for a total loss, a coinsurance penalty may apply. And a property insured for a less than adequate amount may not receive full coverage after a coinsurance penalty is imposed.

Purchasing an insurance policy with inadequate limits can be result in a catastrophic financial loss. When the unexpected happens, here comes the surprise — you have uninsured losses. These losses can run into the thousands of dollars and may bankrupt your business.

Check with your agent or broker to review your insurance documents and find out if your insurance policy carries a coinsurance clause. Coinsurance may not apply to all claims. If you have not yet purchased insurance be sure to ask if there is a coinsurance clause before buying.

Calculating Coinsurance

In the simplest terms, the coinsurance provision in a property policy requires the policyholder to carry a limit of insurance equal to a specified percentage of the value of the property (or cost to replace the property) to receive full payment at the time of a loss. For example, a building with a value of $1,000,000 and a policy with an 80 percent coinsurance clause must be insured for at least $800,000 to avoid a coinsurance penalty at time of loss.

If the replacement amount is less than the coinsurance percentage, a penalty is applied, reducing the claim payment. For example, a policyholder has $600,000 of property insurance and a fire causes $200,000 in damages. The claim is calculated by dividing the amount of insurance purchased ($600,000) by the value at time of loss ($800,000). This factor (75 percent) is multiplied by the amount of the loss ($200,000 x .75 = $150,000). In this example, the policyholder would receive $150,000 (less any deductible) for a $200,000 claim.

What Policies Include a Coinsurance Clause?

Many building, inland marine and business personal property insurance policies include a coinsurance clause. Some policies require 100 percent of the value to be insured.

What can you do to mitigate a coinsurance clause?

The coinsurance clause included in the policy language can be “suspended” for the term of the policy by adding an agreed amount endorsement – the insurer and the insured agree on an adequate amount of insurance and the coinsurance clause will not apply to a loss.

The best way to avoid a coinsurance clause for your business structure is to make sure you adequately insure everything. If you aren’t sure about the value of your business structure then you can either trust the insurance company’s assessment or commission an appraisal on your own.

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About Terri A. Kamoto

Senior writer for FSN - Terri is a former financial analyst dedicated to making personal finances, budgeting, investment and insurance advice accessible, up to date and easy to understand. It is hard to find professional advice written in a language someone without a financial background can understand. Terri helps companies synthesize industry lingo and expertise into clear and informative content which builds smarter, financially successful individuals. You can find Terri on !

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