07/21/2023
A little known fact about insurance policies is the coinsurance clause...
A coinsurance clause is a provision commonly found in insurance policies, particularly property insurance and health insurance. It is designed to encourage policyholders to share the risk of loss with the insurance company by requiring them to pay a certain percentage of the covered expenses after the deductible has been met.
In property insurance:
In property insurance, the coinsurance clause is applied to commercial property and sometimes to homeowners' policies. The clause typically states that the policyholder must insure the property for a specified percentage of its full replacement value. This percentage is often set at 80% or 90%.
If the policyholder fails to maintain coverage equal to the required percentage of the property's value, and a covered loss occurs, the insurance company may only pay a proportionate amount of the claim, rather than covering the full loss. This means the policyholder becomes responsible for a larger portion of the loss out-of-pocket.
Example:
Let's say a commercial property is valued at $1,000,000, and the policy has an 80% coinsurance clause. The policyholder should carry insurance coverage of at least $800,000 (80% of $1,000,000). If they only insure the property for $600,000, which is 60% of its value, and a $200,000 loss occurs, the insurance company will only pay 60% of the loss, or $120,000. The policyholder would have to cover the remaining $80,000.