Coinsurance is the part of an insurance claim the insured pays if he doesn't buy enough property insurance coverage. Typically, property insurers require policyholders to carry insurance equal to a specific percentage of the value of the property -- usually around 80 percent. For example, if a property owner has an 80 percent coinsurance clause in his policy and a building that's worth $300,000, he has to insure the property for at least $240,000. If he doesn't, the insurer pays for only a part of the loss. The insured pays for the rest.
Determine the Value
The insurer determines the value of the property at the time of the loss. The percent of the coinsurance is based on the percent of coverage divided by the value of the property multiplied by the cost of the damage. For example, if the policyholder only buys $180,000 in insurance, but the coinsurance requirement is 80 percent or $240,000 for a $300,000 property, then the insurer's coinsurance obligation is 75 percent -- since $180,000 is 75 percent of 240,000. The insured covers the other 25 percent.
Calculating a Damage Claim
If a fire causes $100,000 in damages, the insurer calculates the claim by taking the percent and multiplying it by the amount of the loss. Based on this calculation, the insurance company pays the policyholder $75,000 for the loss -- 75 percent of cost of the damage -- instead of the total $100,000 loss ($100,000 X .75 = $75,000).
Subtract the Deductible
The deductible is the amount that the insured pays before the insurance company pays the claim. Assuming the insured has a $1,000 deductible, the policyholder ends up paying the $25,000 coinsurance and the $1,000 deductible, and the insurance company pays the remaining $74,000 for the claim. The policyholder could have avoided this penalty and saved $74,000 by meeting the coinsurance requirement.
Avoid the Coinsurance Penalty
The insurance agent should keep the property owner informed of any increases in value that brings the coinsurance below the mandated percentage, but it's ultimately up to the insured to stay on top of his property's value. The agent may fail to do this to keep the policyholder's premium down, since an increase in coverage causes the cost of the policy to go up. Policyholders should review policies annually and update the coverage value as needed. Also, ask agents about a waiver of the coinsurance clause. This waiver removes the coinsurance requirement for policyholders, but can increase the cost of the premium.
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