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What is Coinsurance?

actual cash value vs replacement cost value

Coinsurance may well be one of the most confusing and misunderstood terms in insurance. Not all policies have a coinsurance clause, but those that do often cause confusions and frustration among clients who are not aware of its impacts.

Coinsurance is the percentage of value that the policyholder (insured) is required to insure. If you insure your property for less than that amount, your insurance company imposes a "coinsurance penalty" once a claim is filed.  The value of a loss is determined at the time of the loss and if the amount of insurance is found to under the stated coinsurance percentage then a penalty is applied reducing the claim payment. According to the Independent Insurance Agents of America, most business policies include a "coinsurance" clause, determining what percentage of the value of your property must be insured in order to be fully reimbursed for a loss.

Here's how it works:

Let's say you have a building that you believe would cost $100,000 to replace and the coinsurance penalty in your policy is 80 percent. You insure the building for $80,000 thinking you have fulfilled the coinsurance clause. A fire loss causes $60,000 worth of damage, so you submit a claim. Your insurance company subsequently determines that the replacement cost of the building is actually $150,000. To determine how much to pay on the claim, the insurer divides the amount of insurance you purchased ($80,000) by the amount you should have purchased (80% of $150,000 or $120,000). The result (two- thirds of the actual damage, or $40,000) is the amount of your claim the insurer will pay.

If the building had been insured for at least $120,000, the insurer would have reimbursed you for the full amount of the loss. Coinsurance can be tricky and potentially cost you a ton of money if you under insure your property.

We would love to answer any questions that you might have. Contact Kovalev Insurance today and request a complimentary consultation to ensure your property is properly protected.

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