## 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