The Co-insurance Penalty Most Overlook

March 3, 2016


You never read the fine print, do you? This section is found in almost every type of property insurance policy that you MUST become familiar with.

This is usually found in the “conditions” section in a Homeowners Policy or Commercial Property Policy. Most people mistake this section as being harmless and choose not to read it carefully, which is where this costly mistake has a chance to manifest.


What is Co-Insurance?

If you have no clue what co-insurance is, I’m 100% positive you never had to deal with it. In this case, I am happy. If you ever had to deal with co-insurance penalty, I’m also 100% sure by now you know that the devil is in the details.

Co-Insurance defined is; a method of insurance by which property is insured for a certain percentage of its value by a commercial insurance policy while the owner assumes liability for the remainder of it.


Example of Scenario: Let’s take John for example:

  • John has damage to his roof due to a bad thunderstorm that rained, and hailed. His house repairs are actually valued at $250,000
  • He has an 80% coinsurance clause but is insured for only $180,000.
  • Since its insured value is less than 80% of its replacement value, when it suffers a loss, the insurance payout will be subject to the underreporting penalty.

For example, if it suffers a $100,000 loss, the insured would recover $180,000 ÷ (0.80 × 250,000) × 100,000 = $90,000 (plus any deductible). In this example, the underreporting penalty would be $10,000 out of your pocket.

Do you think John was happy or unhappy after he received this bad news? He was very unhappy. Since his insurance agent failed to explain this concept to him, instead of him paying a deductible like he assumed, he is going to pay $10,000 plus his deductible. He still isn’t a very happy camper.


What can you do to prevent this?

Long story short, make sure your coverage meets the coinsurance requirement! Your insurance agent should be discussing these important things to you.

A fun fact about all of this is that many agents may not even understand this section of the policy themselves. Where does that leave you?

This is exactly why you deserve a trusted insurance adviser. Insurance is like most products-you get what you pay for!

If you want to know more about the coinsurance section of your policy and how it can drastically impact your situation, contact one of our insurance advisers or simply give us a call at 217-345-7063.

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