Coinsurance is the percentage of property value that the policyholder is required to insure.
If one insures the property for less than that amount, the insurance company imposes a "coinsurance penalty" once a claim is filed. The value is determined at the time of the loss. If the amount of insurance is found to be under the stated coinsurance percentage, then a penalty is applied reducing the claim payment.
Most business policies include a "coinsurance" clause, determining what percentage of its value the property must be insured for in order to be fully reimbursed for a loss.
Example: There is a building that one believes would cost $100,000 to replace and a coinsurance penalty in the policy of 80 percent. One insures the building for $80,000 thinking they have fulfilled the coinsurance clause. A fire loss causes $60,000 worth of damage so a claim is submitted. The insurance company subsequently determines that the replacement cost of the building is actually $150,000.
To determine how much to pay on the claim, the insurer divides the amount of insurance purchased ($80,000) by the amount that should have been purchased (80% of $150,000 or $120,000). The result (two-thirds, or $40,000) is the amount of the claim the insurer will pay.
If the building had been insured for at least $120,000, the insurer would have been reimbursed for the full amount of the loss.
Coinsurance can be tricky and could end up having a high cost if one under insures the property.
Reach out to one of R&R's Knowledge Brokers to ensure that you have the proper amount of coverage and to clarify any questions you may have on coinsurance.