What is coinsurance?

What is coinsurance?

A common but seldom understood provision in a property insurance policy is coinsurance.   We have found that many law firms don’t know what coinsurance is and how it affects their insurance policy.

Coinsurance is a “penalty” from insurance companies for underinsuring property.   Only 2% of property losses are total losses, while 86% of property losses are less than 20% of the property’s value.   So to make sure that clients don’t provide limits of insurance that are less than the values of the property, the insurance company has a coinsurance penalty.

Insurance companies will require clients to insure their property up to a specified percentage of the property’s value (usually 80%, 90%, 0r 100%).   If the insured amount is less than the appropriate percentages, the insurance company will invoke the coinsurance penalty in the event of a claim.

Example:

The best way to explain coinsurance is with an example of how it works.   Let’s say that a law firm has a building that is worth $1,000,000.   However, to save money on their premiums, the firm decides to insure the building for only $500,000, knowing that its chances of a total loss are minimal.

Now let’s say the law firm experiences a fire that will cost $150,000 to repair.   When the adjuster arrives to assess the damage, he realizes the building’s value is $1,000,000 instead of the $500,000 provided by the firm.   Since the firm only purchased limits equal to 50% of the building’s value, the insurance company will invoke a coinsurance penalty and pay for only 50% of the claim.

It becomes readily apparent with the example that it simply is not worth it to try and insure the property for amounts less than their actual value.   Doing so will not save you much on your insurance premiums while causing you significant headaches in the long run.