Coinsurance

What is coinsurance?

In property insurance, coinsurance is a clause in some policies that stipulates a minimum level of coverage a customer needs to carry. Typically, it’s expressed as a percentage of the property’s estimated value, commonly 80%, 90%, or 100%.

The value can be the rebuild or replacement value, cash value, or another calculation—it’s up to the insurance provider.

If the customer chooses a level of coverage below that value, any claim settlements they receive under the policy will be reduced by roughly the same proportion that the customer underinsured.

This is called “coinsurance” because it’s a situation where the customer is self-insuring part of their property while the insurer covers the remainder.

Some insurance customers choose low coverage limits to save money on premiums. Coinsurance clauses are one tool that insurance providers use to encourage their customers to buy the appropriate level of coverage for their property.

If you undertake any major renovations or other improvements to your property, it can affect coinsurance as well; an increase in your property rebuild value can suddenly put you under the coinsurance limit if you don’t also raise your limit of coverage.

How do you calculate coinsurance?

Each insurance policy may stipulate its own way of calculating coinsurance. But, at the basic level, all you need to know to calculate a settlement under coinsurance is: the amount of coverage the insurer requires, the actual amount of coverage the customer bought, and the amount of the loss.

In this example, Matilda chose to self-insure half of her property’s value, so when she makes a claim for this loss, the insurer will only cover the portion that it was actually responsible for.

Here’s the basic formula for calculating a claim settlement under a coinsurance clause:

(Actual insured amount / Required insured amount) × Amount of loss = Settlement

So, in the case of Matilda’s claim, it would look like this:

($100,000 / $160,000) × $50,000 = $31,250

The total cost of repairs to Matilda’s property will be $50,000. But, due to the coinsurance clause and Matilda’s lower level of coverage, her insurer will only cover $31,250 of that cost, even though the total loss is under her coverage limit. The remaining $18,750 is the coinsurance penalty, and Matilda would need to cover it out of her own pocket.

Do home insurance policies have a coinsurance clause?

When it comes to home insurance in Canada, you’ll probably never see a coinsurance clause.

You may be more likely to encounter them in the United States. But even there, they’re pretty rare on home insurance policies. Coinsurance clauses are more common under commercial property insurance policies.

Rather than using coinsurance penalties, at Square One, we include what’s known as Guaranteed Building Replacement Cost coverage.

By purchasing coverage equal to 100% of the home’s estimated replacement cost, your policy would cover the full cost of repair or rebuilding even if it unexpectedly exceeds the coverage limit. Plus, you don’t have to estimate the replacement cost yourself; our quote system will do it for you automatically.

The important points

• Coinsurance applies when a policyholder decides to purchase less coverage for their property than would be required to fully cover the rebuild cost.

• If the purchased limit of coverage is less than required by the insurer, a coinsurance penalty would apply to claims made under that policy.

• Coinsurance is basically non-existent on Canadian home insurance policies.

Looking for another insurance definition? Look it up in The Insurance Glossary, home to dozens of easy-to-follow definitions for the most common insurance terms. Or, get an online quote in under 5 minutes and find out how affordable personalized home insurance can be.