The first time that many hear the phrase “coinsurance” is in a letter from their insurance carrier after a loss. Many policyholders are shocked to learn that they will not receive the full value of their claim due to the policy’s coinsurance provision.
Coinsurance provisions can be confusing for both the policyholder and the insurance adjuster. Your insurance company may not correctly apply the provisions. To ensure that you are fairly compensated, it is important to understand how coinsurance works.
Does My Policy Have a Coinsurance Provision?
Coinsurance provisions appear in many different types of policy forms—Commercial property, homeowners, health care insurance, etcetera.
The quickest way to determine whether your policy has a coinsurance provision is to review the policy coverage declarations. An example of a policy declaration with a coinsurance provision is as follows:
How Coinsurance Works
A coinsurance provision reduces the policyholder’s recovery if the coverage limits purchases are below the defined percentage of the property’s value. If insurance purchased by the insured is not at least equal to a specified percentage (commonly 80 percent) of the value of the insured property. In the above provision, the limits of insurance are $80,000. The provision contains an 80% coinsurance clause. This means that the policyholder must purchase at least $64,000 in coverage. If the policyholder purchased less than $64,000, they would be responsible for a proportionate share of the loss.
Why Might I want Coinsurance?
Coinsurance may permit policyholders to self insure and save some costs on premiums. That is fine if it is a calculated business decision. Unfortunately, many policyholders are unaware that their policy contains coinsurance and believed that they were fully covered.