Property and Casualty Insurance · Property Insurance · 6 min read
Coinsurance and Required Limits
- Explain the concept of insurance to value and the purpose of the coinsurance clause in property insurance.
- Calculate claim settlements using the standard ISO commercial property coinsurance formula, including the correct sequence for applying the deductible.
- Identify policy options and settlement provisions that modify, suspend, or address coinsurance and underinsurance conditions.
The Purpose of Coinsurance and Insurance to Value
In property insurance, a coinsurance clause sets a coverage threshold based on the property's value; if you carry less insurance, a covered loss payment may be reduced. The primary purpose of coinsurance is to encourage the policyholder to insure property to full or near-full value. This concept is known as insurance to value, which means carrying a policy limit that adequately reflects the property's value under the valuation method specified in the contract, such as actual cash value or replacement cost.
Property owners frequently experience partial losses rather than total losses. Without a coinsurance clause, an owner might buy a very low coverage limit that is just high enough to cover small, common losses while paying a much lower premium. Coinsurance helps prevent a property owner from paying for a low limit while expecting full payment for a partial loss. It encourages policyholders to carry limits reflecting true property values, helping insurers charge premiums appropriate to the coverage provided.
Under standard Insurance Services Office (ISO) commercial property forms, the coinsurance condition applies only if a coinsurance percentage is shown on the declarations; insurers may use their own forms and endorsements. Standard commercial property forms commonly specify coinsurance percentages such as 80 percent, 90 percent, or 100 percent. While an 80 percent coinsurance requirement is common in commercial property coverage, the percentage depends on the specific policy. The clause does not force an insured to purchase 100 percent insurance to value unless a 100 percent clause is selected. A higher coinsurance percentage may qualify for a lower rate per unit of insurance while raising the required limit, whereas a lower percentage or the absence of coinsurance may result in a higher rate per unit of insurance, depending on insurer rating practices. Note that coinsurance clauses in property insurance are completely distinct from percentage coinsurance or cost-sharing provisions found in health insurance.
Common mistakes
- Subtracting the deductible from the loss amount before applying the coinsurance fraction instead of applying the fraction first and subtracting the deductible afterward.
- Assuming that every total loss automatically pays out the full policy limit without checking whether a coinsurance calculation or valuation rule limits the recovery.
- Confusing property insurance coinsurance, which encourages insuring to full value, with health insurance coinsurance, which represents ongoing cost-sharing between insurer and insured.
- Assuming that an agreed value optional coverage suspends coinsurance permanently rather than only for the specific period shown in the declarations.
Key points
- Coinsurance is a property insurance clause designed to encourage policyholders to carry insurance to value, which means maintaining limits reflecting actual cash value or replacement cost.
- Under standard ISO commercial property forms, the required amount of insurance equals the property value at the time of loss multiplied by the coinsurance percentage shown on the declarations.
- When coverage carried is below coverage required, calculate the coinsurance reduction using 'did over should,' multiply the loss by that fraction, and subtract the deductible last; do not apply a fraction greater than one.
- A coinsurance penalty represents the portion of a loss the insured must absorb because of underinsurance, making the insured a co-insurer for that portion.
- Inflation Guard can help a limit keep pace with rising values, while Agreed Value suspends coinsurance for its stated period; neither option guarantees adequate payment after renovations or other changes in value.
- Standard ISO homeowners forms require a building limit of at least 80 percent of full replacement cost immediately before a loss to avoid an underinsurance adjustment on replacement cost settlements.
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