What is coinsurance?
The term coinsurance has two different meanings. Small tech companies are usually more familiar with the first type of coinsurance: a coinsurance clause in a property insurance policy. Larger companies with significant risk might have the joint insurance that is the second type of coinsurance.
Coinsurance can refer to a property insurance clause
Your commercial property insurance might include a “coinsurance clause” that determines adequate coverage for your business’s property. This clause requires you to hold coverage equal to a certain percentage of your property's value, typically 80%.
Coinsurance can also mean a joint insurance policy provided by multiple insurers
Sometimes, multiple insurance providers share the risk of providing coverage for an individual or a business. When two or more insurers cooperate to provide a joint insurance policy, their coverage is known as “coinsurance.”
Why do insurers include coinsurance clauses in property insurance policies?
Your insurer may be required by law to provide its clients with adequate property insurance coverage. By adding a coinsurance clause to its insurance policies, the insurer makes clients partially responsible for purchasing adequate coverage.
Even if an insurer isn’t legally obligated to provide adequate coverage, it may include a coinsurance clause for other reasons:
- To ensure clients have adequate insurance coverage. If a client fails to purchase adequate property insurance coverage, they may regret it later on when they go to file a claim. A coinsurance clause ensures that clients always get the coverage they need.
- To avoid paying higher claims. Even if they aren’t maxing out their coverage limit, clients usually make higher claims on more valuable properties. A coinsurance clause allows insurers to pay just a portion of those higher claims if a client didn’t purchase adequate coverage.
- To encourage accurate property value assessments. When clients are required to purchase objectively adequate coverage, they’re more likely to report accurate property value assessments, which benefits both the client and insurance provider in the long term.
How does a coinsurance clause change your property insurance?
A coinsurance clause requires you to purchase property insurance that covers a certain percentage of the total value of your property, typically 80%. If your commercial property is worth $400,000, for example, you must purchase a property insurance policy that covers at least $320,000 of that.
If you fail to purchase adequate coverage, your insurer can penalize you by refusing to completely fulfill a claim, even if it falls within your policy limit. Your insurer will typically calculate this penalty by dividing your coverage by the minimum adequate coverage, and fulfilling that portion of your claim.
Say, for example, that you purchased commercial property insurance that covers just $300,000 of your $400,000 office. In your coinsurance clause your insurer defines adequate coverage as 80% of your total property value – so $320,000. Because $300,000 / $320,000 = 0.94, your insurer will pay just 94% of any claims you make.
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