Coinsurance

Coinsurance – A provision in an insurance policy requiring the policyholder to cover a set percentage of an insurance loss.

Imagine you've purchased a property insurance policy, but when a loss occurs, you find out that your claim payment has been reduced due to coinsurance. How could this be possible?

TL;DR

Coinsurance is a provision in most insurance policies requiring the policyholder to insure their property up to a certain percentage of its value.

It's vital in day-to-day agency work because underestimating property value could lead to a coinsurance penalty that reduces the claim payment.

A common pitfall is being underinsured due to a misunderstanding of how coinsurance works.

A quick win for agencies is to provide clients with detailed explanations about coinsurance to avoid penalties.

What Is Coinsurance in Insurance?

In the world of insurance, coinsurance refers to the percentage of an insurance claim that the policyholder agrees to pay. If you are the insured, you are sharing the risk of loss with your insurance company.

Technically, it's a sharing agreement between the insurer and the insured. It appears in many kinds of insurance policies (property, health, etc.), typically in the policy declarations or a similar section.

Key Related Terms to Know

Underinsurance – When the insured has not purchased enough coverage to meet the coinsurance requirement.

Co-pay – A fixed amount an insured person pays for health care services.

Deductible – The amount the insured must first pay out-of-pocket before the insurance company begins to cover a loss.

Policy limit – The maximum amount an insurance company will pay for a covered loss under a policy.

Common Questions About Coinsurance

What does coinsurance mean in a property insurance policy?

Coinsurance in a property insurance policy is a clause that requires the insured to have insurance covering a specified percentage of the property's value. If the property is not insured to the prescribed value, there is a coinsurance penalty in the event of a loss.

Does coinsurance apply to every kind of insurance?

No, coinsurance is not applicable to all forms of insurance. For instance, it is common in health and property insurance but less common in auto insurance.

What’s the purpose of coinsurance in a policy?

The coinsurance clause encourages policyholders to carry insurance equal to a specified percentage of the total value of property to receive full benefits in the event of a loss.

How does coinsurance impact my claims?

If your insurance coverage doesn’t meet or exceed the coinsurance requirement, it could result in a reduced claim payout. This is known as a coinsurance penalty.

Coinsurance vs. Deductible

Coinsurance and deductibles are both methods of cost sharing in an insurance policy, but they work differently. A deductible is a set amount the insured must pay before the insurer starts to pay, while coinsurance is a percentage the insured pays after the deductible is met.

	Deductible	Coinsurance
Primary use case	To limit the insurer’s exposure to small claims.	To motivate the insured to carry adequate insurance and share in the risk of loss.
Concept type	Fixed amount the insured pays before the insurer pays.	Percentage of cost the insured pays after the deductible.
Typical exceptions	Applies to each loss or each policy year (for health insurance).	Does not apply until after the deductible is met.
Who is most affected by errors	Individuals and businesses who don’t understand how their policy works.	Insureds who are underinsured and face a coinsurance penalty as a result.
Common mistakes	Selecting too high of a deductible and not being able to afford it at the time of a claim.	Not understanding the implications of coinsurance and underinsuring property.

Real Claim Examples Involving Coinsurance

Scenario 1: A manufacturing company had a total fire loss. They had insured their building for $800,000 but it was actually worth $1,000,000. The coinsurance requirement in the policy was 80% coinsurance meaning they were required to carry at least $800,000 of coverage. Because they did not meet the coinsurance requirement, they faced a coinsura

Limitations and Common Mistakes

Coinsurance does not apply until after you have met your deductible in health insurance.

Not understanding the coinsurance requirement can lead to significant underinsurance.

Misinterpreting the meaning of coinsurance can often cause policyholders to select lower limits to save on premiums, not realizing the potential penalties.

How to Explain Coinsurance to Clients

Personal Lines: "Imagine coinsurance like a partnership between you and the insurance company. You both agree to share the cost of risks. By doing so, you can lower your overall insurance cost."

Small Business: "Coinsurance is mainly about risk sharing. Your business and the insurance company share the financial risk equally. This plays an important role should there be any claims."

CFO/Risk Manager: "Understanding coinsurance is key to sound financial management. It's part of an insurance policy that makes sure losses are shared between your organization and your insurer, which can significantly affect your claims."