The term coinsurance can refer to either a property coverage provision called a coinsurance clause or coverage provided by more than one insurance company.
What is coinsurance?
Coinsurance can mean two different things:
1. Property coverage provision set by your insurer. Your property insurance policy might have a coinsurance clause that requires you to carry coverage for a certain percent of your property's value. That way, your insurer can be sure you have adequate coverage if you need to make a claim.
2. Insurance that is provided by more than one insurance company. When two or more insurance providers jointly cover a person or entity, their coverage is called coinsurance.
For small business insurance, the first definition is the one that usually applies. If you see the term in a policy, it is most likely a property insurance provision that requires you to insure your business property to 80% of its value.
How does coinsurance work?
In a typical commercial property insurance policy, a coinsurance clause ensures that you carry adequate coverage to protect your possessions. Say your office building is valued at $200,000. To protect that property for its value, you would need at least $200,000 in property insurance coverage. If your policy has a clause with a coinsurance percentage of at least 80%, that means you must insure the building for at least $160,000.
If you purchase less coverage (e.g., a policy with only $150,000 in business property protection), the insurance company can penalize you. In other words, when you make a claim for damaged property, the company may not pay out the full value of your damages, even if they fall within the limits of your policy.
For instance, a fire causes $100,000 worth of property damage and you make a claim. Your property insurance policy has a limit of $150,000 and a $5,000 deductible. Per your coinsurance clause, you were supposed to purchase at least $160,000 in coverage.
Because you failed to meet your coinsurance percentage of 80%, you will face a coinsurance penalty. Your penalty is determined by the ratio of the amount you carried divided by the amount that was required: $150,000 / $160,000 = 0.937. So if your loss was $100,000, your insurer will only pay you $93,700 minus your $5,000 deductible. Your total penalty will end up being $11,300.
Why do insurance companies have coinsurance clauses?
Not every insurance company includes a coinsurance clause in its policies. However, those that do require coinsurance typically have three reasons for doing so:
To ensure clients have adequate coverage. This is perhaps the most important. With insurance, you may not want to invest enough money to cover all of your assets, but if you ever need coverage, you’ll be happy you have adequate protection.
To protect their pool of resources. If your business has lots of assets, it has lots of opportunities for damages that lead to an insurance claim. Requiring you to buy insurance that matches your risk exposure means the insurance provider is better equipped to handle real-world claim situations.
To encourage accurate assessment and underwriting. When you’re required to meet coinsurance limits, you’re more likely to make an accurate assessment of the value of your assets, which benefits the insurance provider (and you) in the long term.
When you apply for coverage through Insureon, our insurance specialists can answer questions about your property insurance policy and its coinsurance requirements.
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