coinsurance
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.

Taking the time to understand your insurance policy 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, Prairie Villa Insurance has gathered the basics on coinsurance to help eliminate any potential confusion.

Calculating Coinsurance

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 per cent coinsurance clause must be insured for at least $800,000 to avoid a penalty at time of loss. This particularly applies to partial losses where the entire property is not destroyed.

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 required 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, stock, equipment, contents and inland marine policies, for example, all contain the coinsurance clause mentioned above. Some policies even require that 100% of the value of the property must be insured to prevent a co-insurance penalty.

What can you do to mitigate a coinsurance clause?  The coinsurance clause included in the policy language can be “suspended” 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 amount of insurance is adequate, and the coinsurance clause will not apply to a loss. However, this endorsement is not available on all policies.

Prairie Villa Insurance understands coinsurance provisions and can help you review your policies to ensure your coverage meets your expectations. Contact us today to learn more.

Questions?

Contact us and one of our brokers will be happy to assist you.

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