Coinsurance is a little known, little understood, but very common clause for most property insurance coverages. Not understanding how it works – as well as not re-evaluating your homeowners insurance policy from time to time – can cause serious problems when you need to file a claim.
Here’s what you need to know.
What is Coinsurance?
Coinsurance is often included as a clause in property insurance policies. It’s essentially an agreement between the insurance company and you (the property owner) to share in the cost of a claim.
A coinsurance clause requires you to purchase a minimum amount of coverage for your property in order to receive full compensation if you have a claim.
The minimum amount is most often 80 or 90 percent of the building’s value. It can be as low as 70 percent, but 80 and 90 are more common.
As an example, let’s say the cost to replace your home is $350,000 and you have a 90 percent coinsurance requirement. That means you’d have to purchase at least $315,000 in coverage in order to be fully covered in a claim.
What Happens if You Don’t Meet the Coinsurance Minimum?
Let’s look at that example in a very real-world situation.
Your home is currently valued at $350,000 to replace it. Your minimum insurance requirement is 90 percent or $315,000. But when you purchased your policy several years ago, the value to replace your home was $300,000, and you haven’t reviewed your policy since.
What Happens When You File a Claim?
Using a fairly simple formula, the coverage for your claim will be recalculated – and it will be lower. That means you’ll get less coverage and pay more out-of-pocket.
To find the coverage in our example, let’s follow the formula with a $100,000 claim and a $5,000 deductible:
1. Amount of coverage you actually have ($300,000) divided by Minimum amount of coverage you should have ($315,000) = ratio of difference
$300,000/$315,000 = 0.952
2. Amount of claim multiplied by the ratio = total amount that insurance will actually cover
$100,000 x 0.952 = $95,200
3. Total minus your policy’s deductible = total amount that insurance will pay
$95,200 – $5,000 = $90,200
Your insurance company will only pay $90,200 for a $100,000 claim, leaving you to pay the remaining $9,800 out-of-pocket, nearly double the deductible.
How to Avoid Coinsurance Problems
It’s important to review your homeowners insurance at least once a year. If you make upgrades to your home or realize that prices have gone up (as they’ve done since 2020), it never hurts to review your policy limit more than once within the same year.
Your homeowners insurance coverage needs to increase as both your home ages and the costs to replace your home rise. By increasing your policy limits over time, you can avoid the problem of not having enough coverage per the coinsurance requirements in your policy.
Not sure you have enough homeowners coverage? Curious about the coinsurance requirements in your policy? Contact Charlotte Insurance today!