You might need to get your glasses out for this one and actually dig into your insurance policy. In short, a coinsurance provision in a property insurance policy means an insured shares in a loss. You might say isn't this the purpose of a deductible? And the answer would be yes, sort of...
But coinsurance in your property policy is NOT the same as the coinsurance you’re used to with your health insurance. This is one area where it can really pay to read the fine print… or find an Insurance Advisor who you trust to properly explain the pitfalls of coinsurance to you.
While coinsurance could ultimately lead to the insured (you) participating in a portion of the loss, the real purpose is to encourage you to insure your property for its full replacement value.
Insurance rates are determined on a number of assumptions. A major one is projected losses. Another is that every insured will select enough insurance, dollar-wise, to cover the full value of an insured property. However, some insureds will figure that most losses are small and rarely a total loss. So those insureds will insure for less than the value of the property. In turn, the premiums received by the insurance company are less than expected.
The insurance company reasons that if you want to insure for less than full value, you'll have to share in the losses. The insurance policy will set a coinsurance percentage, frequently 80%. That percentage will be the basis for loss sharing. If the insured maintains insurance to the required percent, there is no loss sharing. For example, a $100,000 building, an 80% coinsurance requirement, and $80,000 of insurance equals full recovery. Meeting the required coinsurance percentage means no loss sharing.
Coinsurance penalties are established at the time of a loss. If your property has increased in value from the time your policy was issued, you could be surprised when your loss recovery is reduced because of a penalty.
Coinsurance is more complex in detail, but those are the basics. What looks like a rip-off at the time of a loss settlement actually translates into premium savings over the years. Want to avoid coinsurance problems? Then don't avoid this tip!
Tip. Dodge coinsurance penalties with avoidance tools. Review this with your agent!
Ask about an agreed value provision. This allows you and your agent to set the amount of insurance you carry. If this agreed amount is carried, then a coinsurance provision is waived. Other avoidance tools are Replacement Cost Coverage and Inflation Guard Protection. These prevent your coverage from falling below the required coinsurance percentage, forcing you to share a loss.
If you’d like to learn more, contact one of our Licensed Advisors or complete the form above. We’re here to help.
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