Coinsurance Clause in Insurance

What Is a Coinsurance Clause?

A coinsurance clause is added to some insurance policies to determine the amount of reimbursement that a property owner will receive from a claim. It is usually located on the declarations page of your policy. 

Under this clause, the amount of insurance that you purchase (known as the limit of insurance) must be equal to or exceed a certain percentage of the insured property’s value. 

For example, the clause may state that an 80% coinsurance applies to the building that you own and want to insure. In that case, the limit of insurance you purchase must be worth at least 80% of the building’s total value. 

If you select a policy limit that does not meet that specified percentage, then the insurance company may reduce your claim payment in proportion to this deficiency. This means that you will receive only partial reimbursement, according to the formula. 

Understanding the Coinsurance Formula

When you file a new claim, you need to know whether your limit of insurance will or will not meet your coinsurance requirement as defined in the clause. 

To find the answer, multiply the value of your property by the coinsurance percentage. This will yield the minimum insurance amount required for that property. 

Applying a Coinsurance Clause to a Claim

If you need to file an insurance claim on one of your properties, it’s important to know whether that policy contains a coinsurance clause. If it does, then your claims professional can work with you to determine:

• Your applicable limit of insurance
• The value of the lost or damaged property at the time the loss occurred
• Whether the limit of insurance equals or exceeds that amount
  

Then, they will work with you to apply the coinsurance percentage to the value of the property. Most clauses require policyholders to insure between 80% and 100% of their building’s total value. If you agree to insure for less than the amount required by the clause, then you agree to retain part of the risk if a loss occurs. 

Real-World Scenarios for Landlords

If you own and lease a building to tenants, you should know how much you may be required to pay in the event of a loss. Two real-world scenarios can help you understand the difference in how coinsurance affects your claim.

Scenario 1:

The value of the building at the time of loss is $110,000, and the coinsurance percentage is 90%. Your limit of insurance is $99,000, which satisfies this requirement. As such, the amount due on the claim is unaffected and paid without penalty. 

The insurance company will determine the cost to repair the damage, based on Replacement Cost Value, or RCV. You will receive that amount, minus your deductible, to cover the expense in full. 

Scenario 2:

The value of the building at the time of loss is $150,000 and the coinsurance percentage is 90%. Your limit of insurance is $67,500.

Under the requirements, this limit is too low and should be at least $135,000. The amount that you purchased is only 50% of what’s required ($67,500/$135,000). 

As such, the amount payable will be only 50% of the necessary repair costs based on Replacement Cost Value (RCV), minus your deductible. 

Avoiding a Coinsurance Penalty

To avoid paying a coinsurance penalty, carefully read all of the details in your coinsurance clause, if one exists. You should also have your building appraised at least once every three years to stay up-to-date on its appraised value. Your insurance agent can help you make sure you’ve set your landlord insurance limits appropriately to meet all requirements.