October 18, 2018

Understand Your Co-Insurance Clause Like an Insurance Pro

Overhead view of two men shaking hands over a wooden table scattered with a laptop, papers, file folders, and clipboards.

Co-insurance may appear on the declaration page of your farm, hobby, or home insurance policy. If you see this clause, your insurance coverage may be limited.

How? Well, let’s dive in.

Definition

Co-insurance, simply, is an agreement between the policyholder and the insurance company advising that a minimum amount of insurance must be purchased to replace property in the event of a loss. Otherwise, the policyholder becomes a “co-insurer” and assumes some of the risk on their property. If you look at your policy declarations page, you might see co-insurance next to a percentage, it’s generally a number between 80% and 100%.

The co-insurance clause safeguards the policyholder by asking them to make a realistic evaluation on their property and the costs to replace it. This method also provides the insurance company with an accurate picture of the value of the property for a fair premium.

How does Co-Insurance Work?

Co-insurance is calculated based on the amount of insurance you have on the property compared to the amount of insurance you should have. The two examples below outline the same loss and how the co-insurance clause applies if you are underinsured or properly insured. Note, these are examples only, and are meant to help you understand co-insurance and how an accurate valuation of your property is so important.

Example 1

Let’s say a farm policyholder experiences a fire, and has a partial loss to their barn storing a variety of farm-related contents. After review, it is determined the policyholder is covered for the loss, but underinsured, this means the co-insurance clause on the building will activate.

Building Value…………………………………$300,000
Co-insurance Requirement……………….80%
Required Amount of Insurance…………$240,000
Actual Amount of Insurance……………..$120,000
Cost to Repair………………………………….$200,000

(Actual amount of insurance) x Amount of Loss = Amount of claim to be paid by the insurer less any applicable deductible.
(Required amount of insurance)

($120,000) x $200,000 = $100,000
($240,000)

Example 2

Let’s use the same scenario where the farmer DID insure to 80% of the building value, the calculation would change. In this scenario, the policyholder is fully covered, and the co-insurance clause does not activate.

Building Value…………………………………$300,000
Co-insurance Requirement……………….80%
Required Amount of Insurance………….$240,000
Actual Amount of Insurance……………..$240,000
Cost to Repair………………………………….$200,000

($240,000) x $200,000 = $200,000
($240,000)

As you can see in the first example, the policyholder becomes a co-insurer in the loss because they have not purchased enough insurance. This means partial costs of repair the barn falls on the policyholder. In the second example, the property is insured to the appropriate value so, the insurer will pick up the full costs of the repair, less any applicable deductible.

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