Understanding Coinsurance: Why It Matters for Your Insurance Coverage

When reviewing an insurance policy, you may come across the term coinsurance. While it may sound complicated, understanding how coinsurance works can help you avoid an unexpected financial surprise after a loss.

What Is Coinsurance?

Coinsurance is a provision found in many commercial property insurance policies that requires you to insure your property to a certain percentage of its value—commonly 80%, 90%, or 100%.

For example, suppose your commercial building would cost $1,000,000 to replace, and your policy has an 80% coinsurance requirement. You would generally need at least $800,000 of insurance coverage to satisfy the coinsurance requirement.

The important point is that coinsurance is based on the value of the property, not simply what you paid for it.

What Happens If You Don't Have Enough Coverage?

If you insure your property for less than the required coinsurance amount, you may face a coinsurance penalty when you have a covered loss.

For example:

·      Replacement value of the building: $1,000,000

·      Coinsurance requirement: 80%

·      Amount you should carry: $800,000

·      Amount you actually carry: $600,000

·      Covered loss: $200,000

Because the property was underinsured, the insurance company may reduce the amount it pays for the claim based on the coinsurance formula. Depending on the policy and circumstances, you could be responsible for a significant portion of the loss yourself.

Why Property Values Matter

Construction costs can change significantly over time. Materials, labor, permits, and other expenses can all affect the cost of rebuilding a property.

This is one reason it's important to review your insurance coverage regularly. A coverage limit that was adequate several years ago may no longer be sufficient today.

Coinsurance Isn't the Same as Your Deductible

Coinsurance and your deductible are two different things.

Your deductible is the amount you agree to pay toward a covered claim before the insurance company pays the remainder, subject to the policy terms.

Coinsurance, on the other hand, can affect whether the amount of insurance you purchased meets the policy's required percentage of the property's value. If you don't meet that requirement, a coinsurance penalty may apply.

How Can You Avoid an Unpleasant Surprise?

The best approach is to work with your insurance professional to make sure your property is properly valued, and your policy's coinsurance requirement is understood.

If you own a business, don't assume that the property's current market value or tax-assessed value is the same as its replacement cost. Those figures can be very different.

Your insurance professional can also explain whether your policy offers options such as agreed value coverage, which may suspend the coinsurance requirement when specific conditions are met.

The Bottom Line

Coinsurance is one of those insurance terms that may not seem important—until you have a claim.

Having the right amount of insurance coverage is an important part of protecting your property and your financial investment. If you haven't reviewed your property coverage recently, now may be a good time to discuss your limits, valuation, and coinsurance requirement with your insurance agent.

At AlaCoast Insurance Agency, we help our clients understand not just what their insurance costs, but what their coverage actually means. If you have questions about coinsurance or want to review your current property coverage, we're here to help.

Insurance policies vary, and coverage is subject to the terms, conditions, exclusions, and limitations of the individual policy. This article is intended for general informational purposes and is not a substitute for reviewing your specific policy with a licensed insurance professional.