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Coinsurance Clause

By on June 9, 2019

The coinsurance clause is a provision in property insurance policies that requires the homeowner to maintain a specified coverage level which amount to a certain percentage of replacement value.

The common minimum coverage is 80% of replacement value.

The failure to comply with this requirement would result in the homeowner incurring a share of the losses from his own pocket.

The reasoning behind these co-insurance clauses is to ensure that the insured retains certain responsibilities in caring for his house.

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It also helps insurers to reduce their potential losses from claims.

When calculating the required coverage, homeowners must take into account the appreciation in value of the house.

A $100,000 house that requires 80% ($80,000) coverage today does not mean the same figures the following year.

For example, the property value rises 10% to $110,000, then the new required coverage becomes $88,000.

To calculate the amount of losses an owner has to absorb, the coinsurance formula can be applied.

(Amount of coverage / Required coverage) x Amount of loss

Let’s use an example with the following numbers.

  • House valued at $500,000
  • Coinsurance factor of 80%
  • Required coverage is $400,000
  • Actual coverage is $350,000
  • Loss incurred is $50,000

Using the figures above,

($350,000 / $400,000) x $50,000 = $43,750

In this case, the homeowner would have to absorb $6,250 ($50,000 – $43,750).



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