Coinsurance is not something new in the insurance industry. It is, however, something that some policyholders seem to have a difficult time understanding. Many individuals not familiar with insurance think of the coinsurance clause as a penalty clause. Actually, the coinsurance section of a policy can be looked at as a double-edged sword.
Benefit of the Coinsurance Clause
Policyholders can save money as a result of the coinsurance clause. The clause sets forth the minimum amount of insurance the homeowner must carry to satisfy policy underwriting requirements. In other words, an 80%, 90% or 100% coinsurance clause establishes the percentage of the home’s value the policy holder must insure.
Homeowners Coinsurance Example
A homeowner with a $500,000 house subject to a 100% coinsurance clause must insure the house for the full $500,000 value and pay premiums accordingly. However, insuring the same house with a 90% coinsurance clause would mean carrying a policy limit of $450,000. Similarly, the very same house with an 80% coinsurance requirement means having a policy limit of $400,000.
Why Select One Coinsurance over the Other?
The primary reason for insuring less than 100% of the home’s value is to realize a premium savings. As long as the amount of insurance purchased meets the coinsurance requirement, there’s no insurance penalty in the event of a claim. If however the insured does not purchase enough insurance to satisfy the coinsurance clause, she will be penalized based upon the percentage of the shortfall. The coinsurance penalty is calculated as follows:
(Amount of Insurance Carried/Amount of Insurance Required) x Amount of Loss = Claim Payment
Example of Homeowner’s Coinsurance Penalty
A $500,000 house with an 80% coinsurance requirement is insured for $380,000. The homeowner submits a claim for a fire loss of $6,000. The claimant would receive $5,700 calculated as follows:
$380,000/$400,000 (or .95) x $6,000 = $5,700
It’s best to review property and insurance values annually to ensure the proper insurance coverage. It’s too costly discovering at the time of a loss that the policy limits are not adequate.
Which Coinsurance to Choose?
When deciding whether or not to insure the home for 100% of value or chose a lesser coinsurance requirement, consider the home’s location and the perils that are most likely to occur. If the home is located in an area with severe weather patterns and a possibility of a 100% loss, it is wise to insure the home to full value.
However, for more temperate climates that are not subject to natural disasters, homeowners have the option to choose a lower coinsurance requirement. One should purchase enough insurance to ensure a “quiet night’s sleep.” In other words, don’t let the dollar savings be the only driving factor in choosing the coinsurance.
Insuring a house up to 80% of its value has been a common practice in the homeowner insurance industry for many years. It’s a perfectly legal way to shave the cost of insurance. It’s up to the consumer to evaluate the home, the region and premium savings to determine whether or not to go with a lower coinsurance requirement.