Coinsurance: What It Is & How It Works
Taking the time to understand your insurance policies is well worth the effort. 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, ALIGNED Insurance has gathered the basics on coinsurance to help eliminate any potential confusion.
In the simplest terms, the coinsurance provision in a property policy requires the policyholder to carry a limit of insurance equal to a specified percentage of the value of the property to receive full payment at the time of a loss. For example, a building with a value of $1,000,000 and a policy with an 80 percent coinsurance clause must be insured for at least $800,000 to avoid a coinsurance penalty at time of loss.
Here’s where it gets a bit more complicated: If there is 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?
What can you do to mitigate a coinsurance clause? The coinsurance clause included in the policy language can be removed for the term of the policy by adding an agreed amount endorsement. This is a provision where the insurer and the insured agree that the total insurable value (TIV) typically outlined on a statement of values is adequate and the coinsurance clause will not apply to a loss.
ALIGNED Insurance understands coinsurance provisions and can help you avoid or remove it from your policy to ensure your coverage meets your expectations and you get what you pay for.
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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.