How does coinsurance affect my building insurance?
A coinsurance clause is a common clause in many policy forms that requires an insured to purchase a minimum amount of insurance based on a percentage of the values insured if one wishes to receive a full payout in the event of a partial loss. To calculate coinsurance, divide the amount of insurance carried ("DID") from the amount of insurance required ("SHOULD") and multiply the result by the loss amount: Payout = (DID / SHOULD) x Loss Amount.
A coinsurance requirement can affect your building insurance in 2 major ways:
First, it could reduce the payout in the event of a loss. Let's say Darren owns a building valued at $1,000,000 with a coinsurance requirement of 80%. In this case, he should insure it for $800,000. If, however, Darren only bought an amount of insurance of $400,000 and had a loss valued at $100,000, the insurer would only pay out: ($400,000 / $800,000) x $100,000 = $50,000. As you can see, the payout was reduced by half because Darren only bought half of the insurance limit he should have.
Second, the forces of inflation could cause trouble for a policyholder subject to a coinsurance clause. If you are a large property owner, it is not hard to imagine that inflation could quickly push your values up to the point where you would be violating your coinsurance requirement. If this is a concern, you should explore insuring your buildings on a Stated Amount basis.
It's important to note that the coinsurance penalty does not apply to total losses or losses valued below 2% of amount of insurance or $5,000 (whichever is lesser). This is called a Waiver of Coinsurance.
More Q&As from our experts
- Does my company need cyber insurance?
- Does home insurance cover snow damage?
- Can I get a discount on my car insurance if I have winter tires?
Stay informed with Insuranceopedia!
The world of insurance can be complicated. Subscribe to the Insuranceopedia newsletter and stay in the know! Access expert content, industry term definitions and answers to your questions from knowledgeable insurance insiders. Arm yourself with what you need to know to keep your assets and your family safe.
- Free Life Insurance Quoter Tool: Get a life insurance quote online in minutes with Insuranceopedia and no hassles.
- Get a Life Insurance Quote with Insuranceopedia
- Get a life insurance quote online in minutes with Insuranceopedia's Free Life Insurance Quoter
- Win $100 Amazon Gift Card by taking our short reader survey!
- Win $100 Amazon Gift Card by taking our 2-minute Reader Survey