Property Insurance: What is Co-insurance?

Co-insurance for property insurance addresses the policy holder’s promise to purchase a limit of insurance that is equal to a percentage of the actual value of the property being insured.  Should the policy holder not purchase to the percentage of the actual value of the property being insured, the insuring carrier will penalize the policy holder at the time of a loss.  This penalty will be calculated into the final settlement of the loss.

The intent of co-insurance is to make sure that the policy holder is purchasing property insurance limits that are the actual value of the property.  In some cases to save premium costs, the limit purchased is lower with the belief that the chance of a total loss is highly unlikely.

Examples:

  • If a building is actually valued at $100,000 and the limit of insurance purchased is $100,000, the policy holder has insured to 100%.
  • If a building is actually valued at $100,000 and the limit of insurance purchased is $90,000, the policy holder has insured to 90%.

When purchasing a property insurance policy and determining the limit of insurance, you will be informed of your options to select a percentage of the actual value of the property.  If you select 100% co-insurance, you are promising the insurance carrier that the limit you are requesting is 100% of the actual value of your property.  If you select 90% co-insurance, you are promising the insurance company that the limit you are requesting is 90% of the actual value of your property.  The available co-insurance percentages are typically limited to 100%, 90% or 80%.

If you are very confident that you know the precise actual value of your property, you can select 100% co-insurance.  You will not suffer a co-insurance penalty at the time of loss, since your limit is the same as the actual value of your property.  If you are not very confident that you know the precise actual value of your property, you may select 90% or 80%, depending on your confidence level.

Most policy holders are very concerned that they may suffer a co-insurance penalty, as they are not confident in the precise actual value of their property.  In order to secure a margin of error, they elect a 90% or 80% co-insurance and set a limit of insurance that they believe is 100% of the actual value of their property.  Depending on the co-insurance percentage, this will allow them a 10% or 20% margin of error before they are faced with a co-insurance penalty scenario.  There is a cost to secure this margin of error and this does not increase the limit of recovery.

The co-insurance penalty formula utilized by most insurance carriers is as follows:

                    Limit Purchased                     X  Amount of Loss  =  Settlement
Actual value of property  X  Co-insurance %

There are methods to eliminate co-insurance or to help manage its application.  Co-insurance is generally a regular clause in most business insurance policies, but it can also apply to personal insurance policies as well.  It is not only applicable to real property and contents, but also applies to certain Business Interruption coverage forms and Valuation clauses.

This is only a brief, generalized explanation of co-insurance.  An in-depth discussion and explanation with an insurance underwriter is highly recommended.  For more information, please contact one of our offices to discuss your coverage options.  All statements and information communicated in this blog are subject to the terms, conditions, limitations and exclusions of each policy.