Coinsurance is a clause contained in some property insurance policies to encourage policy holders to carry a reasonable amount of insurance. Eric shares some important specifics to avoid any penalties.
Coinsurance requires an insured to maintain coverage in an amount that is at least that percentage of its actual replacement value and can act like a penalty. For example, if you have 80% coinsurance on a building that has a replacement value of $10,000,000, you are required to maintain coverage in an amount of at least 80% or $8,000,000. If you don’t, in the event of a claim, the insurance company will penalize you.
In this example, if you maintained only $4,000,000 of coverage, which is 50% of the minimum required limit of $8,000,000, the insurance company would only pay 50% of a property claim. If possible, you should always ask your broker if the insurance company will provide Agreed Amount, which waives coinsurance. For more information please contact us.