Coinsurance Clause
A provision in property insurance policies that requires the policyholder to carry insurance coverage equal to a specified percentage (typically 80% or 90%) of the property's full replacement value to avoid a penalty at claim time. If the policyholder carries less than the required percentage, they become a 'co-insurer' and must pay a proportional share of any loss, even if the loss is less than the policy limit. This clause encourages adequate insurance coverage and prevents under-insurance.
Example
“When the warehouse fire caused $200,000 in damage, the business owner discovered his policy's 80% coinsurance clause meant he would only receive $150,000 because he had under-insured the building at $500,000 when it was actually worth $800,000.”
Memory Tip
Think 'Coinsurance = Co-pay the loss' - if you don't insure enough, you co-pay part of every loss with the insurance company.
Why It Matters
Coinsurance clauses can dramatically reduce claim payments even for partial losses, making it essential to maintain adequate coverage limits that keep pace with inflation and property values. Many property owners unknowingly trigger coinsurance penalties by failing to update their coverage amounts, resulting in significant out-of-pocket expenses during an already stressful claim situation.
Common Misconception
Most people think coinsurance clauses only matter if they have a total loss, not realizing that under-insurance penalties apply to all covered losses, regardless of size. Many also assume that as long as their loss is less than their policy limit, they'll receive full payment, not understanding that inadequate total coverage can reduce payments on any claim.
In Practice
Restaurant owner Bob has a building worth $1 million but only carries $600,000 in coverage on a policy with an 80% coinsurance clause. When kitchen equipment worth $100,000 is damaged by fire, Bob expects full payment since it's well under his $600,000 limit. However, since he should have carried $800,000 (80% of $1 million) but only had $600,000, he's penalized. The insurance company pays only $75,000 ($600,000 ÷ $800,000 × $100,000), leaving Bob responsible for the remaining $25,000 despite having a policy limit that seemed adequate for this loss.
Etymology
From 'co-' meaning together or jointly, plus 'insurance,' indicating that the policyholder and insurer share the risk together when coverage is inadequate, with 'clause' from Latin 'claudere' meaning to close or conclude.
Common Misspellings
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