Simply Explaining Insurance #113- Coinsurance

This episode includes two of my favorite things. Insurance and math! I talk about coinsurance and what that means on a commercial property policy. This is not to be confused with coninsurance on a health insurance policy as these are different.

Coninsurance essentially is an agreement between the insured and the insurance company agreeing that the insured will cover their property or building to at least 80% (or 90% or 100%) of its value.

If it isn’t covered to at least that amount and there is a claim, the claim will pay out only a percentage of what the loss is. Let me show you an example.

Example

Suppose that “80% coinsurance” appears in the declarations of your commercial property policy. The following example demonstrates what this means.

You own a building that will cost $1 million to replace. Because the coinsurance percentage is 80, you must insure your building for at least $800,000 (80% of $1 million) to avoid a penalty. You want to save money on insurance premiums so you insure your building for only $700,000. Your policy has a $5000 deductible.

A fire breaks out in your building and causes damage that costs $200,000 to repair. At the time of the loss, your limit of insurance was $700,000. To satisfy the 80% coinsurance requirement, you needed to purchase at least $800,000. The ratio of the amount you carried divided by the amount that was required (700,000 / 800,000) is .875. While your loss was $200,000, your insurer will pay you only $175,000 (200,000 X .875) minus the $5,000 deductible or $170,000. Your coinsurance penalty is $25,000.