Why the Coinsurance Clause Matters on Your Commercial Property Insurance

May 28, 2019

Have you ever agreed to something without reading the fine print? If so, you’re not alone. According to a Deloitte study, 91 percent of consumers accept legal terms and conditions without reading them.

It’s understandable in a way – legal terms can be long and difficult to understand. Unfortunately, this practice may also cause problems. Your property insurance contract, for example, is filled with important clauses that you need to know. One of these is the coinsurance clause.

What is the coinsurance clause?

Many people are familiar with coinsurance or copayment clauses in health insurance. After you have paid your deductible, you may still have to pay a set amount or a percentage of the cost when you receive covered medical care. For example, you might have to pay $25 every time you see the doctor.

Coinsurance in property insurance is a little different.

Essentially, coinsurance clauses require the insured to purchase insurance coverage that reflects the value of the property being insured. If the insured purchases a lower coverage limit, he or she is accepting responsibility for difference in coverage. This is where the “co” in coinsurance comes from.

For example, let’s say you have a property valued at $100,000 and your coinsurance clause requires 100 percent coverage. This means your coverage limit cannot be less than 100 percent of $100,000 – that is, it must be $100,000. With a 90 percent coinsurance clause, you will need a coverage limit that is at least 90 percent of $100,000, or $90,000. If you obtain less coverage, a coinsurance penalty will apply on all losses, based on the proportionate difference.

Why does the coinsurance clause matter?

If you don’t understand your coinsurance clause, you may get less money than you’re expecting when you file a claim. 

Continuing with the previous example, let’s say you have a 100 percent coinsurance clause on a $100,000 property, but you only get $50,000 in coverage. Then you experience a $50,000 loss, and you file a claim. Because your loss is equal to your limit, you may expect a full payout of $50,000. However, because of the coinsurance clause, this is not what you will receive.

In this example, you obtained insurance for only 50 percent of the property’s value, despite the clause requiring 100 percent coverage. By doing so, you accepted personal responsibility for 50 percent of the value. This means your payout will only reflect 50 percent of the loss – in this case, $25,000, minus any deductible. You are responsible for the remainder.

These figures are just examples that make the math simple. Many coinsurance clauses require coverage at 80 or 90 percent of the property’s value. To calculate your payment, the insurer will take the loss and multiply it by the amount of insurance you have divided by the amount of insurance required by the coinsurance clause, minus any deductible.

How should people deal with coinsurance clauses?

This is just one example of why it’s very important to read your property insurance contract carefully. If there is anything you don’t understand, ask your agent to explain it to you.

If you want full coverage, make sure the amount of insurance you have is equal to the amount of insurance required by the coinsurance clause. To do this, you will need to know the value of the property. You also need to know the property insurance limit you have purchased. Have your property appraised regularly, and update your coverage limits regularly.  If it’s been a while since you looked at your property insurance, contact your Heffernan agent for a review.