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Coinsurance Clause Explained

how a coinsurance clause works

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How A Coinsurance Clause Works

How Does a Coinsurance Clause Work?

An insurance policy is a complex contract that often contains provisions that assign certain responsibilities to the policyholder, such as a coinsurance clause. Because such provisions are often misunderstood here the basics on how a coinsurance clause works to help minimize any potential confusion.

How do you Calculate Coinsurance Penalties?

In simple terms, the coinsurance clause forms part of a commercial property insurance policy and is imposed by insurers to encourage the policy holder to carry a limit of insurance that is equal to the value of property being insured or at least equal to a specified percentage of the value of the property.  If the value the insured reports to the insurance company does not meet the specific threshold they will not receive full payment should they incur a loss.

If there’s a claim, the formula to determine the recovery is based on the property’s replacement value at the time of loss. If the replacement amount is less than the coinsurance percentage, a penalty is applied, reducing the claim payment. For example, a policyholder has $600,000 of property insurance and a fire causes $200,000 in damages. The claim is calculated by dividing the amount of insurance purchased ($600,000) by the value at time of loss ($800,000). This factor (75 per cent) is multiplied by the amount of the loss ($200,000 x .75 = $150,000). In this example, the policyholder would receive $150,000 (less any deductible) for a $200,000 claim.

What Policies Include a Coinsurance Clause?

Property Insurance policies typically include a coinsurance clause. Building, business personal property and inland marine policies can also all contain the coinsurance clause mentioned above. Some policies require 100 per cent of the value to be insured.

The coinsurance clause can be “suspended” for the term of the policy by adding an agreed or stated amount endorsement.  This is a provision where the insurer and the insured agree to an amount of insurance and the coinsurance clause will not apply to a loss.

To Learn More About How Coinsurance Works Speak To An ALIGNED Insurance Advocate Or Connect With Us Today At

ALIGNED Across Canada   100% Canadian owned, ALIGNED is a premiere insurance brokerage that serves more than 1,400 clients across the country. ALIGNED’s offices in Toronto, Calgary and Vancouver are supported by a national operations centre in Cambridge, Ontario. Uniquely within the industry, ALIGNED creates, negotiates and delivers the best business insurance and risk management strategies/solutions to organizations like yours.

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