Co-insurance explained

Have you heard of co-insurance?  You should as its built into most policies you purchase and can have a huge impact on your claim payout.  This is one of those hidden clauses to your insurance contract that's explained in the policy booklet possibly buried on page 9062 and one you may not understand even after reading.  So what is co-insurance? Co-Insurance is basically what you should have carried divided by what you did carry to determine if your coverage is sufficient to pay out at the policy limit.  If you carried less then your co-insurance percentage limit then for every percentage you are below that limit the carrier can knock that same percentage off your claim check - make sense? Probably not..  Basically if you under insure your home your insurance company imposes a “coinsurance penalty” once a claim is filed.

Here's how it works....

Let’s say you have a building that you believe would cost $100,000 to replace and you have a co-insurance clause of 80 percent.  You insure the building for $80,000 thinking you have fulfilled the coinsurance clause (80% of $100k = $80k).  A fire loss causes $60,000 worth of damage so you submit a claim.  Your insurance company subsequently determines that the replacement cost (rebuild value) of the building is actually $150,000.
 
To determine how much to pay on the claim, the insurer divides the amount of insurance you purchased ($80,000) by the amount you should have purchased (80% of $150,000 or $120,000).  The result is that you carried two thirds of what you should have carried therefore they will pay out two thirds of your claim.  Two thirds of the $80,000 loss is $40,000 which is the amount of your claim the insurer will pay minus your deductible.
 
If the home would have been insured for at least $120,000, the insurer would have reimbursed you for the full amount of the loss.  Coinsurance can be tricky and cost you a ton of money if you under-insure your property.  We see many clients come to us severely under-insured and we find that most, had they been explained the repercussions, would rather insure their structure to value and look for other ways to save on premium besides lowering the building limit.    

Why pay even a dollar for a policy that will barely pay out - when you walk away from your agent all you get is a piece of paper and a promise, make sure they can live up to that promise by working with an agent who will properly evaluate your risk and rebuild value.