What is Co-Insurance: How Does it Affect Your Property Policy?
By: Kathleen Murray (Capstone Brokerage Client Advocate) March 3, 2015
The co-insurance clause in a property policy is one of the most confusing and misunderstood terms for policy holders. Co-insurance under a property policy is defined as: “the sharing of risk between an insurer and the insured” which is normally expressed as a percentage. Simply stated, the co-insurance clause affects the amount payable in the event of a partial or total loss.
Building insurance, contents coverage, computer coverage, inland marine policies, tool and equipment floaters will almost always have the co-insurance clause ; however, contained in the clause is also a penalty that is applied which will reduce the claim payment.
The essential factor that must be understood in co-insurance is the penalty clause. The co-insurance section of your policy gives your insurance company the right to penalize you by reducing the amount of your claim payment in the event the amount of the insurance you purchased is inadequate. In most policies, the standard amount of insurance that must be purchased is equal to 80% of the replacement value of the property.
The Insurance Policy Language
Who really wants to read their insurance policy?
It actually helps to see the actual wording of the policy to clarify the concept of co-insurance. In the event of a claim, the policy holder must satisfy the specified criteria outlined in the terms and conditions of the property policy.
If a Co-insurance percentage is shown in the Declarations, the following condition applies:
a. “We will not pay the full amount of any ‘loss’ if the value of the covered property at the time of the ‘loss’ times the Co-Insurance percentage is greater than the limit of insurance for the property. Instead, the carrier will pay using the following formula:
As an example: a building with a $1,000,000 value and a policy with an 80% co-insurance clause must be insured for at least $800,000. If the policyholder decides to buy $600,000 of insurance and a $200,000 fire occurs, the claim is calculated by dividing what was purchased ($600,000) by what should have been bought ($800,000). The result in this scenario is 75%. The factor is multiplied by the amount of loss. The calculation works out: $200,000 x .75 = $150,000. The policy holder will receive $150,000 (less any deductible) for the $200,000 claim.
The bottom line is that a policy holder must make sure their coverage meets the co-insurance requirement. This is why a policy holder deserves and should expect to work with an educated and trusted insurance consultant.
