Today’s edition of Insurance Straight Talk explains coinsurance and insurance to value.
In property insurance, a condition of the policy requiring the insured to maintain insurance at least equal to a stipulated percentage of value in order to collect partial losses in full. If the insurance is less than the minimum required, a penalty is applied to the amount of loss based on a proportionate formula of the amount of insurance carried divided by the amount of loss required to be carried.
What’s the coinsurance penalty?
If a policy has an 80% coinsurance clause, for example, this mean that you must have your property insured for at least 80% of the actual replacement cost at the time of the loss or you’re penalized in the event of a claim. In other words, if a dwelling’s replacement cost is $300,000 then you must have > or = $240,000 of coverage or you’re subject to the penalty.
Example of Inadequate Limits of Coverage
- Total Insurable Value (TIV): $300,000
- Coinsurance required: 80%
- Deductible: $1,000
- Amount of Loss: $100,000
- Amount of Insurance Carried – “Did”: $200,000
- Amount of Insurance Required (TIV x Coinsurance) – “Should”: $240,000
Coinsurance Penalty Calculation Factors
- Did / Should ($200,000 / $240,000) = 0.833
- Loss Amount = $100,000
- Deductible = $1,000
- Coinsurance Penalty Calculation: (1. x 2.) – 3. = (0.833 x $100,000) – $1,000
- Amount of Payment (From Coinsurance Penalty Calculation Above) = $82,333
How to avoid coinsurance penalty?
Have your insurance agent run a replacement cost evaluation and make sure you’re insured to value. That is, if the cost to rebuild your house is $300,000 then you should have a policy with dwelling coverage of $300,000. While you might save a few dollars on the front end, if/when you have a loss you’ll likely wish you hadn’t done so. Contact Olde Liberty Insurance today to discuss your Connecticut property insurance needs and for a no-obligation, customized quote.