Beware of Coinsurance

Coinsurance is a penalty provision found in most property insurance policies for underinsurance. It never helps you. It can only hurt at the time of a loss.

Example – Underinsured Building With Coinsurance

Property value: $1 million
80 percent coinsurance clause (requires the purchase of $800K of insurance)
Amount of insurance: $750K
Amount of fire loss: $75K
Loss = what you bought, divided by what you should have bought, times the amount of the loss.
Claim payment = $750K divided by $800K = .9375
.9375 multiplied by $75K = $70,313
$75K – $70,313 = $4,687 Coinsurance Penalty / Uninsured Loss

Example – Correctly Insured Building with Coinsurance

Property value: $1 million
80 percent coinsurance clause (requires the purchase of $800K of insurance)
Amount of insurance: $850K
Amount of fire loss: $75K
Since the amount of insurance is more than the $800K required by coinsurance, the loss payment is the full $75K (less any deductible).

Most insurers will eliminate the coinsurance clause at your request. Many carriers will add a clause to the policy agreeing that the amount of insurance meets the coinsurance clause—called the agreed amount endorsement. Work with your agent to eliminate any coinsurance clauses from your policies.

Strategy: Ask your insurance agent if your property insurance includes a coinsurance penalty. If yes, ask that it be removed. (Then ask your agent why it had not been removed before!)