8.3 Coinsurance & Insurance-to-Value Calculations

Coinsurance Mathematics

Coinsurance is not other-insurance sharing and not health-plan cost sharing. In property insurance it encourages accurate insurance-to-value.

Formula

1. Insurance required = value at time of loss × coinsurance percentage
2. Coinsurance ratio = insurance carried ÷ insurance required
3. Loss payment before deductible = ratio × covered loss
4. Apply the deductible and policy limit as the form directs.

If insurance carried equals or exceeds insurance required, there is no coinsurance penalty, though limits and deductibles remain.

Example 1: compliance

A building is worth $1,000,000 with an 80 percent clause. Required insurance is $800,000. The insured carries $850,000 and has a $100,000 covered loss.

• Carried ÷ required = $850,000 ÷ $800,000, capped at full compliance.
• Covered loss before deductible = $100,000.
• With a $5,000 deductible, payment is $95,000, subject to all terms.

Example 2: underinsurance

The same $1,000,000 building carries only $600,000.

• Required: $1,000,000 × 0.80 = $800,000.
• Ratio: $600,000 ÷ $800,000 = 0.75.
• Covered loss: $100,000 × 0.75 = $75,000.
• Less $5,000 deductible = $70,000 payment.

The uninsured coinsurance amount is not a separate fine paid to the insurer. It is the portion of the covered partial loss retained because the insured carried only 75 percent of the required amount.

Example 3: limit caps payment

A property is worth $2,000,000 with a 90 percent requirement, so required insurance is $1,800,000. The insured carries $1,200,000 and suffers a $1,900,000 covered loss.

The ratio is two-thirds, producing $1,266,667 before deductible, but the $1,200,000 policy limit caps payment before the deductible is applied as the form directs. Always test the limit.

Value at time of loss

Use the valuation basis required by the policy—often replacement cost for replacement-cost coverage. Market value or book value cannot be substituted simply because it is lower. Include covered property at the location and address seasonal inventory, additions, and improvements.

Blanket insurance can combine values at multiple locations or categories under one limit. The coinsurance calculation can use the total covered value subject to the blanket clause. Specific insurance applies separate limits.

Alternatives

• Agreed value: a statement of values and adequate limit can suspend coinsurance for the endorsement period.
• Value reporting: the insured reports changing values periodically; underreporting can reduce recovery.
• Peak season: temporarily increases inventory limits during scheduled periods.
• Margin clause: can limit payment at a location even under a blanket limit.

These mechanisms require compliance. An expired agreed-value endorsement leaves the ordinary coinsurance clause in place.

Deductible order

Many standard examples apply the coinsurance ratio to the loss and then subtract the deductible. Follow the issued form if it states another sequence. Never subtract the deductible from the property value or required-insurance amount.

Common traps

1. Multiplying the loss by 80 percent without first comparing carried and required insurance.
2. Using the policy limit as property value.
3. Applying coinsurance when carried insurance satisfies the requirement.
4. Forgetting the limit cap.
5. Confusing an 80 percent clause with a promise to pay 80 percent of every loss.

Public-adjuster workpaper

Show the valuation date, covered value, percentage, required amount, carried limit, ratio, covered loss, deductible, limit, and result. A transparent calculation lets the insurer and insured dispute the correct input rather than the arithmetic.

Calculate only after confirming all four inputs

A property coinsurance calculation requires the value at the time of loss, the required percentage, the amount of insurance carried, and the covered loss. First compute required insurance: value × coinsurance percentage. Next compute the compliance ratio: insurance carried ÷ insurance required. Multiply the covered loss by that ratio, then apply the deductible and cap the result at applicable limits. Follow the form if it changes that order.

Example: a building worth $1,000,000 has an 80% requirement, so required insurance is $800,000. The insured carries $600,000 and suffers a $200,000 covered loss. The ratio is 600,000 ÷ 800,000 = 0.75. Before the deductible, the adjusted loss is $150,000. A $5,000 deductible produces $145,000 if no other limitation applies. The shortfall is not simply $200,000 minus $600,000.

Insurance to value is the broader practice of setting limits that reflect the relevant valuation basis. Recheck square footage, construction class, local costs, debris removal, code exposure, and valuation date. Agreed-value provisions may alter coinsurance, but only when their conditions are met.