Coinsurance Clause Explained - Insurance Broker (2024)

How Does A Coinsurance Clause Work?

An insurance policy is a complex contract that often contains provisions that assign certain responsibilities to the policyholder, such as a coinsurance clause. Because such provisions are often misunderstood, here the basics on how a coinsurance clause works to help minimize any potential confusion.

What is Coinsurance and How Does It Work?

Co-insurance is when a business or insured person pays a share of the payment made against a claim. In insurance, it’s the dividing of the insurance risk among multiple parties. Co-insurance is an agreement made between you and your insurance company to maintain insurance coverage up to a stated percentage of the property value you wish to insure.

Co-insurance is commonly a clause that insurance companies include for policies covering buildings, equipment, business contents, inventory, and other property. The clause generally ensures that policy holders carry an appropriate amount of insurance coverage and receive a fair premium for their insurance policy.

How Do You Calculate Coinsurance Penalties?

In simple terms, the coinsuranceclause forms part of acommercialproperty insurance policy and is imposed by insurers to encourage the policy holder to carry a limit of insurance that is equal to the value of property being insured or at least equal to a specified percentage of the value of the property. If the value the insured reports to the insurance company does not meetthespecific threshold they will not receive full payment should they incur aloss.

If there’s a claim, the formula to determine the recovery is based on the property’s replacement value at the time of loss. If the replacement amount is less than the coinsurance percentage, a penalty is applied, reducing the claim payment. For example, a policyholder has $600,000 of property insurance and a fire causes $200,000 in damages. The claim is calculated by dividing the amount of insurance purchased ($600,000) by the value at time of loss ($800,000). This factor (75 per cent) is multiplied by the amount of the loss ($200,000 x .75 = $150,000). In this example, the policyholder would receive $150,000 (less any deductible) for a $200,000 claim.

What Policies Include a Coinsurance Clause?

Property Insurance policies typically include a coinsurance clause. Building, business personal property and inland marine policies can also all contain the coinsurance clause mentioned above. Some policies require 100 per cent of the value to be insured.

The coinsurance clause can be “suspended” for the term of the policy by adding an agreed or stated amount endorsem*nt. This is a provision where the insurer and the insured agree to an amount of insurance and the coinsurance clause will not apply to a loss.

What Does an 80% Coinsurance Mean for an Insurance Policy?

The stated percentage is usually 80%, 90%, or 100% of the property value for a co-insurance clause. For example, a $1 million building with 80% co-insurance must be insured for no less than $800,000. If the policy holder chooses to insure the building for less than $800,000, they agree to retain part of the risk with the insurance company. The policy holder becomes the co-insurer absorbs the co-insurance penalty when there’s a claim.

What is the Difference Between Coinsurance and Copay?

Co-insurance is an insurance risk-sharing clause between the policy holder and the insurance company. It calculates the amount of insurance the policy holder should have based on the co-insurance clause stated percentage. Once the policy holder reaches their annual deductible, they’ll start paying co-insurance. The policy holder also has a penalty when a claim is filed if they don’t insure the minimum value of the clause.

Co-pay is a flat fee that the policy holder pays every time they have a medical or another type of claim. Even if you haven’t reached your annual deductible yet, your co-pay would apply. The amount of co-pay is determined by the type of claim and the insurance company.

Is Coinsurance or Copay Better?

Co-pay is generally easier to calculate when it comes to determining how much the policy holder pays. You’ll know how much you need to pay out-of-pocket with a co-pay because the same service will always have the same amount of co-payment. With a co-insurance clause, you pay a percentage of the claim amount, so you could make a more expensive payment depending on how your insurance company decides.

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