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.  

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