Taking the Mystery Out Of Coinsurance
by Tom Franzen, CIC, ARM, ARM-P
Coinsurance can be confusing, even for some insurance professionals. But don’t worry, we’ll break it down simply.
What is Coinsurance? Coinsurance has been around for ages. It’s a way to ensure that insurance premiums are fair and sufficient to cover property losses.
Why Coinsurance? Most property losses (from wind, hail, fire, etc.) aren’t total losses. Because of this, some people think they only need enough coverage for these partial losses. However, insurance relies on many people paying premiums to cover the few who experience losses. This is where coinsurance comes in to make sure there’s enough money to cover claims.
How Does Coinsurance Work? Let’s talk about buildings and business personal property, covered on a replacement cost basis. Coinsurance is usually set at 80% or 90%, though 100% is also available but risky. Here’s an example:
• If your building’s replacement cost is $1,000,000, with 80% coinsurance, you must carry at least $800,000 in coverage.
• With 90% coinsurance, you need $900,000 in coverage.
In essence, you and the insurance company share the risk. The insurer covers $800,000, and you agree to cover the remaining $200,000.
Coinsurance at the Time of Loss: Coinsurance is calculated when you make a claim. For example, if you have $800,000 in coverage on a $1,000,000 building with 80% coinsurance, it seems fine. However, if you experience a loss after significant inflation and cost increases, your coverage might fall short, creating a coinsurance issue.
Key Formula: The coinsurance formula is simple: “Did” (the amount you carry) over “Should Have” (the amount you should have carried). If you have $400,000 in coverage on a $1,000,000 building with an 80% coinsurance clause, you should have carried $800,000. Since you didn’t, you’ll only be paid for 50% of your claim.
How to Avoid Issues: To avoid coinsurance problems, you can use inflation guard coverage and agreed value endorsements, which we’ll cover in the next article. It’s crucial to discuss insurance values and coinsurance with your agent or broker. If they don’t review these details with you, consider finding a new one.
If you have any questions, contact Tom at Tom.F.Franzen@gmail.com.
Tom Franzen is the retained Insurance/Risk Management Consultant for FEMA Services, Inc. With 45 years in the insurance industry, Franzen has experience on both the company and agency sides of the business.