Buying Insurance

Lesson 1: The Basics

Coinsurance

Coinsurance is one of the most important and least understood parts of an insurance policy. The principle of consurance is part of the property side of a policy. Simply put, coinsurance is that percentage of the actual value that a piece of property must be insured for. Most insurance policies require 80% coinsurance. For example, if you wish to insure a building worth $100,000 you must insure it for at least $80,000. Why, you ask, would anyone want to insure something for less than it is worth? Frequently, the answer lies in a misguided attempt to save a few premium dollars. Or it may stem from actual indifference to value, that is, the insured figures that something is better than nothing. The important point to remember is that coinsurance clauses are part of the language of an insurance policy which is a legal contract. Thus failure to comply with the coinsurance provision will have very negative consequences in the event of a claim. Specifically, if you fail to comply with the coinsurance requirements of your policy, and you have a claim, the insurance company will reduce the amount they pay you by the percentage that the insurance falls below the true value. For example, if you wish to insure a building worth $100,000 but insure it for only $50,000, you are 30% below coinsurance,i.e. you are insured at 50% of value instead of 80% of value. Thus at the time of a claim the insurance company would reduce payment to you by 30%. In the case of a total loss, for example, you would receive only $35,000 not $50,000. This is the coinsurance "penalty". (Buyer beware: stay current with your property values through current appraisals or cost estimators.)

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