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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.
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).