What Is the Coinsurance Formula?
The coinsurance formula is thehomeowner's insurance formula that determines the amount of reimbursem*nt that a homeowner will receive from a claim. The coinsurance formula becomes effective when a homeowner fails to maintain coverage of at least 80%of the home's replacement value. Those who are in this situation who file a claim will only receive partial reimbursem*nt according to the formula.
Key Takeaways:
- The coinsurance formula determines the amount of reimbursem*nt that a homeowner or property owner will receive from a claim.
- The coinsurance formula is applied when a property owner fails to maintain coverage of at least 80%of the home's replacement value.
- If a property ownerinsures for less than the amountrequired by the coinsurance clause, they are essentially agreeing to retain part of the risk.
- In this case, the owner becomesa "co-insurer"and will share any loss with the insurance company according to the coinsurance formula.
How the Coinsurance Formula Works
The coinsurance formula is relatively simple. Begin by dividing the actual amount of coverage on the house by the amount that should have been carried (80% of the replacement value). Then, multiply this amount by the amount of the loss, and this will give you the amount of the reimbursem*nt.If this reimbursem*nt value is greater than the specified limits of a single insurance company, a secondary coinsurer will supply the remaining funds.
Coinsurance is a clause used in insurance contracts by insurance companies on property insurance policiessuch as buildings. This clause ensurespolicyholders insure their property to an appropriate value and that the insurer receives a fair premium for the risk. Coinsurance is usually expressed as a percentage. Most coinsuranceclauses require policyholders to insure to 80, 90, or 100%of a property's actual value. For instance, a building valued at $1,000,000 replacement value with a coinsurance clause of 90%must be insured for no less than $900,000. The same building with an 80%coinsurance clause must be insured for no less than $800,000.
If a property ownerinsures a property for less than the amountrequired by the coinsurance clause, they becomea "co-insurer"and will share the loss with the insurance company.
Real-World Use of the Coinsurance Formula
If a property ownerinsures for less than the amountrequired by the coinsurance clause, they are essentially agreeing to retain part of the risk. Thus, they becomea "co-insurer"and will share the loss with the insurance company according to the coinsurance formula.
Here are two examples that demonstrate how the coinsuranceclause works:
Building Value $1,000,000
Coinsurance Requirement 90%
Required Amount of Insurance $900,000
Actual Amount of Insurance $600,000
Amount of Loss $300,000
The coinsurance formula is:
(Actual Amount of Insurance)XAmount of Loss = Amount of Claim
(Required Amount of Insurance)
Inserting the amounts above in the formula produces the following calculation:
($600,000)X$300,000=$200,000
($900,000)
So, in this situation, the owner absorbs a $100,000 coinsurance penalty since they retained one-third of the riskrather than transfer it to the insurer. Therefore, the ownerabsorbs one-third of the loss.If the building had been insured to the amount required by thecoinsurance clause (in this case, 90%),the coinsurance calculation would look like this:
(Actual Amount of Insurance)XAmount of Loss = Amount of Claim
(Required Amount of Insurance)
($900,000)X$300,000=$300,000
($900,000)
In the second example, since the owner met the coinsurance requirement, they are not a co-insurer, and the claim is paid without penalty.
Coinsurance clauses are also found in business interruption policies. These clauses ensure that policyholders insure their revenue stream to an appropriate value.
FAQs
The coinsurance formula is relatively simple. Begin by dividing the actual amount of coverage on the house by the amount that should have been carried (80% of the replacement value). Then, multiply this amount by the amount of the loss, and this will give you the amount of the reimbursem*nt.
What is an example of coinsurance formula? ›
Coinsurance Concept
For example, covered expenses above the deductible may be shared 80 percent insurer/20 percent insured until a policy-stated total is reached. If the total was $2,500, then the insurer would assume $2,000 (80 percent of $2,500), while the insured's portion would be $500 (20 percent of $2,500).
What is coinsurance with example? ›
The percentage of costs of a covered health care service you pay (20%, for example) after you've paid your deductible.
How to explain property coinsurance? ›
Coinsurance is a property policy requirement that means you must insure your home or office to a specific value, often 80% of its replacement cost at the time of the loss. Contact us today so that we can review your current insurance and help you decide if you should increase your property limits."
What is coinsurance in homeowners insurance? ›
What is a coinsurance clause? Homeowners insurance policies typically have a coinsurance clause that requires you to carry coverage worth a certain percentage of your home's value. Failure to meet the requirement reduces your compensation after a loss.
How is coinsurance calculated? ›
The simple formula for calculating the coinsurance penalty is: amount of insurance in place / Amount of insurance that should have been in place x the loss, less any deductible is the amount actually paid.
What is coinsurance for dummies? ›
Coinsurance is an insured individual's share of the costs of a covered expense (it usually applies to health-care insurance). It is expressed as a percentage. If you have a "30% coinsurance" policy, it means that, when you have a medical bill, you are responsible for 30% of it.
What is a real life example of coinsurance? ›
For example, if you have an 80% / 20% coinsurance split with your health insurance company, you will be responsible for 20% of the total cost of your prescription drugs. This means that if you go to the pharmacy and have to pay $100 for your medication, the insurance company will cover $80.
What is an example of the coinsurance effect? ›
Example. If a building is worth $500,000 (cost of rebuilding) but is only insured for $250,000 (50% of its value), a loss causing $200,000 in damages (partial loss) would entitle the insured to compensation of 50%, in other words $100,00, even though the total amount of insurance is $250,000.
How do you explain coinsurance and deductible? ›
A deductible is the amount you pay for coverage services before your health plan kicks in. After you meet your deductible, you pay a percentage of health care expenses known as coinsurance. It's like when friends in a carpool cover a portion of the gas, and you, the driver, also pay a portion.
The 100% coinsurance clause means you need to cover 100% of the value of your business personal property for a claim to be fully paid. If you only cover a portion of the value, the claim will not pay the full value of loss.
How do you explain property insurance? ›
Property insurance refers to a series of policies that offer property protection, including structural damage, theft of personal belongings, and liability coverage. Property insurance can include homeowners insurance, renters insurance, flood insurance, and earthquake insurance.
What is the purpose of putting a coinsurance provision in a property policy? ›
Coinsurance is a common aspect of many commercial property policies. These clauses are essentially penalties that carriers use as an incentive for policyholders to purchase coverage close to the full value of their properties.
Am I responsible for coinsurance? ›
Coinsurance – Your share of the costs of a covered health care service, calculated as a percent (for example, 20%) of the allowed amount for the service. You pay the coinsurance plus any deductibles you owe.
How important is coinsurance? ›
Understanding your health plan's coinsurance can help you estimate your medical costs. Low coinsurance will benefit people needing ongoing care; even if premiums are higher, overall medical bills will be smaller.
Who pays 20% coinsurance? ›
A common coinsurance arrangement is that the insurance plan pays 80%, and the insured covers the remaining 20% of expenses. In health insurance, you must pay your entire deductible before you can access coinsurance. Your deductible is the amount you pay for covered insurance before your plan begins to pay.
What is 20% of my coinsurance? ›
A 20% coinsurance means your insurance company will pay for 80% of the total cost of the service, and you are responsible for paying the remaining 20%. Coinsurance can apply to office visits, special procedures, and medications.
What is an example of 100 coinsurance? ›
For example, let's say you have a property valued at $100,000 and your coinsurance clause requires 100 percent coverage. This means your coverage limit cannot be less than 100 percent of $100,000 – that is, it must be $100,000.
Is the coinsurance formula applied to total losses? ›
Coinsurance as it applies to Property Insurance. Because most property losses are partial and not total losses, the average insured will take advantage of this tendency and only insure enough to cover a partial loss.
