2.3 Coinsurance and the Coinsurance Formula
Key Takeaways
- Coinsurance requires carrying a set percentage (often 80%) of property value at the time of loss.
- Payment = (Did Carry / Should Carry) x Loss, then subtract the deductible, capped at the limit.
- Under-insurance triggers a penalty; the insured shares partial losses proportionally.
- Meeting the requirement pays partial losses in full less deductible; total losses pay the limit regardless.
- An agreed value provision suspends coinsurance and eliminates the penalty.
Coinsurance: The Insurance-to-Value Requirement
Coinsurance is a property-policy provision that requires the insured to carry insurance equal to a stated percentage (commonly 80%, 90%, or 100%) of the property's value at the time of loss. It exists because most losses are partial; without coinsurance, owners would under-insure and pay far too little premium for the protection they actually use on small claims. The clause penalizes under-insurance at claim time.
The Coinsurance Formula
The formula compares what the insured did carry to what they should have carried:
Did Carry (limit)
Payment = ----------------------- x Loss - Deductible
Should Carry (value x coinsurance %)
The result is capped at the policy limit and can never exceed the actual loss. If 'Did Carry' is at least 'Should Carry,' the fraction is 1 (or more) and the loss is paid in full (up to the limit).
Worked Coinsurance Example (Under-Insured)
Building value $500,000, 80% coinsurance, so Should Carry = $400,000. The insured carries only $300,000. A $100,000 loss occurs with a $1,000 deductible.
Did Carry $300,000
---------- = ---------- = 0.75
Should Carry $400,000
0.75 x $100,000 = $75,000
Less deductible -$1,000
= Payment $74,000
The insured absorbs the $25,000 penalty plus the deductible because they carried only 75% of the required amount.
Worked Example (Adequately Insured)
Same $500,000 building, 80% coinsurance (Should Carry $400,000). The insured carries $400,000 and suffers the same $100,000 loss.
$400,000 / $400,000 = 1.0
1.0 x $100,000 = $100,000
Less $1,000 deductible = $99,000 paid
Meeting the coinsurance requirement means partial losses are paid in full (less deductible, up to the limit). Note that a total loss is always paid at the limit regardless of coinsurance — the penalty only bites on partial losses.
Related Provisions and Traps
| Provision | Effect |
|---|---|
| Agreed Value | Suspends coinsurance; insurer agrees a value, no penalty |
| Inflation Guard | Auto-increases limit to keep pace with value |
| Coinsurance waiver | Often applies to small losses (e.g., under $5,000 or 5%) |
Common traps: coinsurance uses value at the time of loss, not when the policy was bought; the deductible is subtracted after applying the coinsurance factor; and carrying MORE than required does not reduce the deductible or pay above the limit.
Choosing the Coinsurance Percentage and the Cost Trade-Off
Coinsurance percentages are most often 80%, 90%, or 100%, and the insured chooses by accepting a rate credit for agreeing to insure closer to full value. The higher the agreed percentage, the larger the premium discount - but also the higher the dollar amount the insured must actually carry to avoid a penalty.
| Coinsurance % | Required limit on a $1,000,000 building | Effect |
|---|---|---|
| 80% | $800,000 | Largest cushion against the penalty |
| 90% | $900,000 | Bigger credit, less cushion |
| 100% | $1,000,000 | Biggest credit, no cushion - must insure to full value |
Exam trap: A higher coinsurance percentage earns a bigger premium credit but is riskier because the insured must carry more to escape the penalty. Candidates wrongly assume higher coinsurance is always safer.
Why the Penalty Exists
Without coinsurance, owners would insure only to the size of likely partial losses (since total losses are rare), paying low premiums while the insurer still pays most claims. Coinsurance forces insurance-to-value so premiums are equitable across insureds. The penalty falls only on partial losses; a total loss simply pays the policy limit regardless, because the limit caps recovery anyway.
Agreed Value and Waiver
Many commercial forms offer an Agreed Value option: the insured files a statement of values, the insurer agrees to a figure, and the coinsurance condition is suspended for the term. This protects an insured who is unsure of valuation. The blanket coverage of multiple locations under one limit also changes how the penalty is computed - using the combined value of all blanketed property rather than each item separately.
A Step-by-Step Coinsurance Walkthrough and the Penalty Logic
Work every coinsurance problem in the same three steps so a time-pressured exam question cannot trip you.
- Compute the required amount = coinsurance % x value at time of loss.
- Form the ratio = limit carried / required amount (cap at 1.0; you never collect more than the loss).
- Apply the ratio to the loss, then subtract the deductible. The result cannot exceed the policy limit.
Fully Worked Penalty Example
A building worth $500,000 is insured for $300,000 under an 80% clause with a $1,000 deductible. A $100,000 partial loss occurs.
- Required amount = 80% x $500,000 = $400,000.
- Ratio = $300,000 / $400,000 = 0.75.
- Recovery before deductible = 0.75 x $100,000 = $75,000.
- Less the $1,000 deductible = $74,000 paid.
The insured eats $26,000 of the loss as the coinsurance penalty plus deductible because they under-insured. Had they carried the required $400,000, the ratio would be 1.0 and they would collect $100,000 - $1,000 = $99,000.
Exam tip: The penalty applies the ratio to the loss, never to the limit. A common wrong answer multiplies the ratio by the limit. Also remember the deductible comes after the coinsurance math, not before.
When Coinsurance Does Not Bite
If the loss equals or exceeds the policy limit, the insured simply collects the limit - coinsurance becomes irrelevant because the limit caps the payout anyway. The penalty only matters on partial losses where the insured carried less than the required amount.
A building worth $400,000 has an 80% coinsurance clause. The owner carries $240,000 and suffers a $50,000 loss with a $1,000 deductible. What does the insurer pay?
Which provision, when added to a property policy, suspends the coinsurance requirement entirely?