How Does Coinsurance Work With Property Coverage?
When applied to property insurance, a coinsurance clause means that the coinsurance is assessed as a percentage of the property value. If your business has property coverage with a coinsurance clause in the policy, your policy will be required to have limits tied to your total property value, assessed as a certain percentage of the total value.
For example, a property valued at $500,000 may have an 80% coinsurance clause, meaning the property must be insured at a minimum of $400,000. Problems may arise for the insured, however, if after a loss event the the insured is found to have been underinsured, based on the assessed value of the total property after the loss event occurs.
When a loss occurs, the claim is assessed by dividing the purchased insurance amount by what should have been purchased. For example, if a fire occurs at the property, it may do $100,000 in damage. If the property was valued at $500,000, and the insured only purchased $300,000, the coverage percentage would be 60%. This percentage would then be multiplied by the claim amount (60% x $100,000) to get the total claim payout: $60,000. That results in a $40,000 penalty to the underinsured policyholder.
Insurance companies will carry a coinsurance clause in order receive the proper payments for the type of risk they are assuming by insuring the property. This was developed as a way to help mitigate situations where property owners were purchasing less insurance than they should, based on the value of the property, but filing claims far larger than the purchased insurance amount. Property insurance will come with coinsurance clauses as a way to standardize property insurance definitions.