Coinsurance/Insurance to Value Revisited: An Essential Concept in Property Insurance

Coinsurance can be described as a property insurance provision that imposes a penalty

One of the more unpleasant situations confronting insurance agents and adjusters after a property loss is having to tell the insured that he or she is underinsured and will be assessed a penalty in the adjustment of the claim. Ideally, the time to discuss coinsurance or insurance to value with the insured is before the loss, rather than after it has occurred. Such a discussion might have avoided this claim scenario. It is not clear how the amount of insurance on the building was determined when the policy was written or whether proper steps were taken to arrive at an accurate replacement value for the building. Based on the above information, it is evident that the insured will incur a coinsurance penalty because of underinsurance (the limit of insurance on the building was less than the amount required by the coinsurance provision).

Coinsurance can be described as a property insurance provision that imposes a penalty on an insured’s loss recovery if the limit of insurance purchased is not at least equal to a specified percentage of the value of the insured property.

The concept of coinsurance can be confusing to insureds without a clear understanding of its purpose. The purpose of coinsurance is to avoid inequity and to encourage insureds to carry a reasonable amount of insurance in relation to the replacement value (or actual cash value, depending on which basis the policy is written) of their property. Consequently, coinsurance provisions typically are incorporated into property insurance policies.

Why is it Necessary?
It is well established that most building property losses are partial in that they do not result in the total destruction of the structures involved. For insureds who recognize this, there may be a tendency to play the odds and limit the amount of insurance purchased. Why pay the premium for full coverage when chances are the full amount may never be needed? Of course, when the property is pledged as security for a mortgage loan, the mortgage company typically requires that the property be insured for an amount that will cover the balance of the mortgage.