What is a Co-Insurance Clause and How Does It Work?

You’ve got the basics down, but now there’s this new term being used you aren’t familiar with: co-insurance. What is it, and how does it work? Co-insurance is a generally misunderstood concept in the insurance sphere. Excalibur Insurance Group want to help you better understand your coverage and the coverage that matters, so we’ve written up this brief little guide to explain co-insurance.

What It Is

Co-insurance is a clause generally utilized by insurance providers that makes sure your property is sufficiently covered, whether that is for its actual cash value or the replacement cost. It helps to guarantee that your insurance provider is charging a justified premium for a specific risk.

Co-insurance is an amount that is typically expressed as a pre-determined percentage which the insured is required to pay “against” a claim, once the deductible has been paid out. Many property insurance plans will include some type of co-insurance obligation. In the event of co-insurance, if your property is underinsured there will be a co-insurance penalty you are required to pay. In the case of commercial property, the co-insurance provision is typically noted on business interruption policies so that business owners buy adequate coverage as determined by their typical revenue.

The short: co-insurance is a means of holding you, the insured, responsible for insuring a part of the risk in the event you have not purchased sufficient insurance from your provider.

How It Works

Typical percentages for co-insurance that are expressed in clauses within your policy may require you to insure your property for either 80%, 90%, or 100% of its overall value. As a general rule of thumb, 80% is typically for properties insured for the actual cash value, gross earnings business interruption, and stock in trade. 90% tends to be for contents and properties insured for their replacement cost, including any industrial equipment. Finally, 100% is used mostly for profits business interruption.

Say you were a business owner with a commercial property that had a replacement value of $200,00, and there is an 80% required coinsurance, you are required to insure your building for at least $160,000. This means that your insurance provider is required to pay for 80% of the claim and you have agreed to take on the remaining risk of 20% – in addition to the deductible. This can be expressed as a simple calculation of the coverage limit, divided by the value of your property, then multiplied by the overall loss. The end result is how much the insurance company will pay out. Take the loss and subtract the amount the insurance company will pay out and that is what you will be required to payout.

I.e, (Coverage limit or amount of insurance / Value of property) * Amount of loss = Amount of claim.

Co-Insurance Advice

Consider the following pieces of advice.

• Always insure your property to its full value. This will avoid any potential co-insurance penalties and gives you peace of mind that your assets and property are adequately insured.
• Hire a professional appraiser. While – yes, a broker is a great tool in determining the replacement cost value of your home, it is always advised to use a professional appraisal to determine that you have purchased sufficient coverage to protect your property.
• Remember your broker is a resource. Coverage should always be reviewed, especially with inflation and the shifting costs of construction. If you can, try to review your coverage annually with your broker or whenever there is a major change in your circumstances so that you can adjust coverage to guarantee full protection. A broker is an expert in identifying gaps and can help you to avoid a co-insurance penalty by advising you on the best coverage for your needs.

Finally, in some instances property owners may be able to purchase a waiver of coinsurance clause for their policies, which surrenders their obligation to pay a coinsurance penalty. For the most part, insurance companies may only waive coinsurance if the claim is relatively small. Generally, insurance providers do not want the co-insurance clause to be removed, as they will want to ensure that the premium they receive is reflective of the total rebuild value of the insured property and covers the risk assumed as much as possible. In some instances, an insurer may replace the percentage co-insurance provision with a “stated amount of co-insurance” provision. This assumes a pre-agreed value replaces the percentage. However, if the property is insured insufficiently – i.e, less than the agreed amount – then the provision assumes the standard 90% clause.

If you are still uncertain about co-insurance, its applications, and the percentages that may apply, discuss with Excalibur Insurance Group’s expert brokers and see how co-insurance could affect you. Your broker should be able to give you advice on what to do in order to ensure that your property has the coverage it needs and you won’t end up with a difficult co-insurance penalty.

If you’d like to discuss with a Excalibur Insurance Group’s expert broker give us a call at 1-888-298-7343.