You’ve probably heard of coinsurance when it comes to health insurance (the amount you pay after meeting your deductible). But did you know your homeowners insurance policy likely has coinsurance too?
If that sounds confusing, you’re definitely not alone! Plenty of homeowners have no idea their property insurance includes a coinsurance clause until it’s time to file a claim, and by then, it can lead to some unpleasant surprises.
But don’t worry; we’ve got your back! In this article, we’ll break down exactly what coinsurance means to help you steer clear of costly mistakes.
What Exactly is Coinsurance In Property Insurance?
Property coinsurance is a clause in your homeowners or commercial property policy that requires you to carry insurance coverage* equal to a certain percentage (either 80, 90, or 100%) of your property’s total replacement value.
If your property policy includes a coinsurance clause, you’re essentially agreeing to keep coverage levels that reflect your property’s true replacement cost. This helps guarantee that your insured property has sufficient coverage in case of loss or damage.
* Note: When we talk about coverage in this article, we don’t just mean “having insurance” or “being covered.” We’re talking specifically about how much insurance you carry on your property (i.e. your coverage limit) and whether that amount meets your policy’s requirements for full protection. It’s a small detail that makes a big difference when coinsurance is involved.
Why Does Property Insurance Have a Coinsurance Clause?
Insurance companies include coinsurance provisions to encourage property owners to purchase enough coverage to fully rebuild or replace their property after a loss. But why exactly do insurers do this?
Think of it this way: Your insurer wants you to carry coverage that’s in line with the true replacement cost of your property, i.e. the amount needed to rebuild or replace your home or building at today’s prices. When everyone keeps their insurance up-to-date, insurance carriers can better manage risks and offer fair rates to everyone.
In short, coinsurance helps ensure fairness and stability for everyone involved, making sure property owners carry realistic levels of coverage that protect their investment.
How Does Coinsurance Work?
The coinsurance clause in your policy sets the minimum amount of coverage you must carry based on your property’s value. If your coverage falls short, your insurer applies what’s called a coinsurance penalty, meaning you’ll share more of the costs in a claim.
Let’s use an example to illustrate:
Say you own a commercial building valued at $500,000, and your insurance policy includes an 80% coinsurance clause. This means you’re required to insure your property for at least $400,000 ($500,000 x 80% = $400,000).
Now imagine you wanted to save on premiums and insured your property for only $300,000, which falls below the 80% threshold required by your insurance company. Then, a fire breaks out, causing $100,000 in damage. Because you didn’t meet your coinsurance requirement, your insurer calculates a coinsurance penalty.
Here’s how the penalty might be determined:
- Your insurance carrier would then divide the actual amount of coverage you carried ($300,000) by the required coverage ($400,000). This equals 75%.
- Because of this shortfall, the insurance company will pay only 75% of your claim—so, in this scenario, they’d cover $75,000, leaving you responsible for $25,000 out-of-pocket.
Ouch, right? That’s exactly why understanding your coinsurance clause matters.
Key Tips for Avoiding a Coinsurance Penalty
Nobody wants an unpleasant surprise when filing a claim. The good news? You can avoid a coinsurance penalty by staying proactive and making sure your policy keeps up with your property’s actual value.
Here are a few smart steps every property owner should take:
1. Review Your Replacement Cost Regularly
Make sure your policy reflects the current replacement cost of your property instead of what it was worth five or ten years ago. Construction costs, materials, and labor rates can change quickly, so it’s a good idea to check in annually or after major renovations.
2. Match Your Coverage Limit to the Amount Required
Your policy likely includes a coinsurance clause that requires you to carry insurance equal to 80%, 90%, or even 100% of your property’s replacement cost. If the coverage limit on your policy is below the amount required, you could face a penalty after a partial loss.
3. Stay in Touch with Your Insurance Carrier or Agent
Insurance isn’t a “set it and forget it” situation. Keep open communication with your insurance carrier or a trusted agent who can help you stay compliant with your coinsurance clause and adjust your policy as needed.
Don’t Let Insurance Catch You Off-Guard
Understanding how property coinsurance works may not be the most exciting topic, but it’s one of the most important things you can do to protect your property and your wallet.
Too often, home- and business owners only learn about coinsurance after filing a claim, when it’s too late to make changes to their policy. But once you know what it is, why it exists, and how to avoid penalties, you’re in a much stronger position to make sure your coverage actually works for you.
If you’re not sure whether your current policy meets the coinsurance requirements or if you haven’t reviewed your coverage limits in a while, don’t wait until a claim forces your hand. Contact the experts at Harry Levine Insurance for a personalized policy review. We’ll help you understand what you have, what you might need, and how to avoid costly surprises down the road.
