Insurance Q&A Series - What is Co-Insurance?
Co-Insurance is a standard clause on insurance policy's and is used by insurance companies to ensure that their clients insure the actual full value of their property, instead of an amount they would be okay with receiving.
We recommend a professional appraisal to determine if the building limit or property values are accurate. More information on co-insurance can be found in the definition below via Wikipedia.
Coinsurance is a penalty imposed on the insured by the insurance carrier for under reporting/declaring/insuring the value of tangible property or business income. It also applies without a concealment for the insured to bear some sort of responsibility and thus reduce moral hazard. The penalty is based on a percentage stated within the policy and the amount under reported. As an example:
A buildings replacement cost actually valued at $1,000,000 has an 80% coinsurance clause but is insured for only $750,000. Since its insured value is less than 80% of its replacement value, when it suffers a loss, the insurance payout will be subject to the underreporting penalty. For example, if it suffers a $200,000 loss, the insured would recover $750,000 ÷ (0.80 × 1,000,000) × 200,000 = $187,500 (less any deductible). In this example, the underreporting penalty would be $12,500. More generally, suppose a building with replacement cost R is insured for amount I, with a coninsurance requirement c, expressed as a number between 0 and 1 (e.g. 0.8 for an 80% coinsurance clause). If this building suffers a loss L, then the insurance payout (less deductibles) would be the smallest of the three amounts, L, I, and IL/(cR). The first two alternatives reflect the fact that the payout will not exceed the loss nor the amount the building was insured for, while the last amount represents the intended action of the coinsurance requirement to penalize underreporting.
The most commonly issued coinsurance percentage would be 80% or 90% but it can be as high as 100%, which would impose the greatest penalty for underreporting. For this reason, it is vital for values of property to be accurately reported and updated annually to reflect inflation and other increases in cost.
Contact Monarch Insurance Brokers for more information.
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