What is a Coinsurance Clause?
A coinsurance clause in regards to property insurance specifies a minimum percentage of a property's assessed cash or replacement value that it must be insured for (typically 80% or 90%). If the insured property owner does not maintain that level of insurance on the property and there is a claim, the insured may be asked to pay a portion of the claim.
Coinsurance offsets the insurer’s risk, and is used to allow for decreased premiums.
Coinsurance Clause Formula and Example
As applied to property, the coinsurance amount can be calculated using the coinsurance formula:
Amount Paid to Insured = (Amount Insurance / Required Coverage) X Amount of Loss
For example, if a property has a replacement cost of $1,000,000 and is insured under an 80/20 coinsurance, then the property must be insured for 80% of that replacement cost or $800,000.
But if the property is insured for only $600,000, then it is insured for 75% of the required coverage (600,000/800,000). If a claim were filed for $100,000 of damages, the insured would receive only 75% of that value, or $75,000.
Inputting these figures into the formula, we'd find:
($600,000 / $800,000) x $100,000 = $75,000