What is coinsurance?
Coinsurance is a penalty imposed on the insured by the insurance carrier for underreporting or underinsuring the value of tangible property or business income. The penalty is based on a percentage stated within the policy and the amount underreported. As an example:
- A building actually valued at $1,000,000 has an 80% coinsurance clause, but is insured for only $750,000. Since it's insured value is less than 80% of its actual value, when it suffers a loss, the insurance payout will be subject to the underreporting penalty.
- If the example above suffered a $200,000 loss, the insured would recover an amount equal to the following calculation:
- Actual Value ($1,000,000) * Coinsurance Clause (0.80) = $800,000
- Insurance Limit ($750,000) ÷ Coinsurance Value ($800,000) = 0.9375
- 0.9375 * Loss Amount ($200,000) = $187,500 less any deductible the insured had to pay
- In this example, the underreporting penalty would be $12,500 ($200,000 - $187.500).
The most commonly issued coinsurance percentage is 80%, but it can be as high as 100%. The latter (100%) would impose the greatest penalty for underreporting. It is vital that the values of property are accurately reported and updated annually to reflect inflation and other increases in cost.