When deciding on insurance policies for your business, you may have seen the term “coinsurance.” Co-insurance can mean different things depending on the policy being discussed. In the context of health insurance, coinsurance may be viewed as a type of cost-splitting between the insured and the insurer. However, in the context of property insurance, coinsurance refers to an underwriting requirement for the policyholder, which may result in a reduction in claim payment if not adhered to.
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 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 to 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.
Small businesses should generally purchase insurance of at least the required amount to make sure they’ll receive full payment in the case of a claim. Additionally, it’s essential to have your property values reassessed each year to ensure that you are not taking a penalty if you do suffer a loss event.
When applied to health insurance, “coinsurance” means that both the insurance company and the insured share a part of the risk for health-related expenses. This is achieved by having an agreed upon deductible amount, a maximum out-of-pocket amount, and a percentage split on all payments above the deductible.
For example:
You may purchase health insurance for your employees with a $500 deductible, a 90/10 coinsurance split, and a $3,000 out-of-pocket maximum. What this means for your employees is that they will be responsible for any medical payments up to $500 before the insurance kicks in.
Unlike with a copay plan, where the insured must cover a certain amount at each visit, a co-insurance plan slowly decreases the insured’s out-of-pocket expenses with each claim. Once the $500 deductible is reached, the insurance company will start enacting their 90/10 coinsurance split, covering 90 percent of the cost, while the insured covers 10 percent. That 90/10 split continues until the out-of-pocket stop-loss maximum -- in this case, $3,000 -- is reached. At that point, the insurance company picks up 100% of the cost.