Coinsurance – What You Don’t Know Can Hurt You

The word “coinsurance” may be the most misunderstood and confusing term in the world of insurance.

One definition of “coinsurance” is used interchangeably with the word “co-pay” – the amount the insurance company pays in a claim. An eighty- percent co-pay (or coinsurance) clause in health insurance means the insurance company pays 80% of the bill. A $1,000 doctor’s bill would be paid at 80%, or $800. The above definition also applies to coinsurance in liability insurance. Few policies have such a clause. Some professional liability and directors’ and officers’ policies in the past included coinsurance. The provision was usually a part of the retention or deductible in a policy. Some employment-related practices contracts have coinsurance.

The term “coinsurance,” when used in the context of property insurance, has an altogether different meaning. Here, coinsurance is the percentage of value that the policyholder is required to insure. A building with a value of $1,000,000 and a policy with an 80% coinsurance clause must be insured for at least $800,000.

To make life more complicated, “value” is determined at the time of the loss. If the amount of insurance is found to be under the coinsurance percentage, then a penalty is applied which reduces the claim payment. This hurts the policyholder.

The building and policy mentioned above illustrates the point. If the policyholder decides to buy $600,000 of insurance and a $200,000 fire occurs, the claim is calculated by dividing what was purchased ($600,000) by what should have been bought ($800,000). The result in this case is 75%. The factor is multiplied by the amount of the loss. The calculation works out:

$200,000 X .75 = $150,000.

The policyholder will receive $150,000 (less any deductible) for the $200,000 claim.

Almost all property insurance policies contain a coinsurance clause. Building insurance, contents coverage, computer coverage, inland marine policies, and tool and equipment floaters all contain the penalty clause mentioned above. Some require 100% of the value!

Disaster preparedness for commercial property insurance customers

Businesses are just as susceptible as homeowners to the potential for catastrophes like hurricanes and floods. While consultants might place emphasis on the importance of emergency continuity plans and other measures that ensure that businesses survive the unthinkable, one of the best ways decision makers can prepare is by reviewing their insurance coverage on a regular basis. All emergency preparedness steps are enhanced when the property the business owns is sufficiently covered. 

"Businesses of all sizes need comprehensive insurance to protect against disaster. Determining the appropriate amount of insurance can be done via property and risk assessments, along with the consideration of recovery options," says Jamie Miller, head of North America property for Swiss Re Corporate Solutions, in an interview with Property Casualty 360. 

One of the most critical areas of preparing a business for disaster is insuring its property. If updated valuations aren't conducted on a regular basis, the replacement cost for the business personal property or the building may not reflect the actual amount needed to restore or rebuild after a crisis. This can lead to settlements that aren't sufficient to cover damages sustained in a natural disaster, fire or other loss. Some commercial customers are proactive about these reviews but others may not. 

Contact us for all your Insurance needs! (321)725-1620 

Bob Lancaster Insurance

Serving Florida since 1964