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

The rates ordinarily used for insuring commercial buildings and personal property are calculated with the assumption that they will be used with an 80 percent coinsurance provision. When a policy contains a higher coinsurance percentage, the 80 percent coinsurance rate is reduced to encourage the insured to purchase higher limits. Therefore, with 90 percent or 100 percent coinsurance, the insured must purchase a greater amount of insurance to comply with coinsurance, but the rate is reduced. When there is no coinsurance requirement or when it is less than 80 percent, the rate is increased.

Commercial property policies of both the American Association of Insurance Services (AAIS) and the Insurance Services Office (ISO) contain coinsurance provisions and examples of how to calculate loss adjustments that are built right into the policies. If the insured purchases insurance at least equal to the coinsurance percentage (say 80 percent), the insurer pays the full value of any loss (either replacement cost or actual cash value, depending on what the insured has purchased), less the deductible, up to the limit of

insurance. If the insured does not meet the coinsurance requirement, he or she will be penalized in the event of a loss and will become a coinsurer. The formula used to determine the amount payable when a coinsurance provision applies is:

The formula used to determine the amount payable when a coinsurance provision applies
(Insurance carried, divided by insurance required, multiplied by the loss, equals the amount recoverable.)

Application of Deductible
When the deductible is subtracted from the loss before application of the coinsurance percentage, this yields a slightly larger adjusted claim payable to the insured than if the deductible were subtracted after application of the coinsurance percentage. Most property insurance policies, but not all, clearly state when the deductible is to be applied.