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

When an insurance policy is silent as to when the deductible should be applied

Let’s take the information provided in the introductory claim situation and figure what the insured would recover in this claim. Using the coinsurance formula and subtracting the deductible before application of the coinsurance percentage, the amount payable to the insured would be $36,750 on a $50,000 loss. It is calculated, using the coinsurance formula, as follows:

Using the coinsurance formula
(Here the deductible is subtracted before application of the coinsurance percentage.)

Had the deductible been subtracted after application of the coinsurance percentage, the recovery would have been $36,500 or $250 less: 75 percent x $50,000 = $37,500 minus the $1,000 deductible. As noted previously, subtracting the deductible before application of the coinsurance percentage results in a slightly higher recovery for the insured.

When an insurance policy is silent as to when the deductible should be applied, the deductible should be applied first — to give the insured the benefit of the ambiguity. (In the ISO Business owners Policy, the deductible is subtracted before application of the coinsurance percentage; in the ISO Commercial Property Policy, it is subtracted after application of the coinsurance percentage.)

Note that it is not mandatory that the insured carry insurance up to the specific percentage, but if the insured does not comply, a penalty will be imposed in the adjustment of the loss.