Co-Insurance

Co-insurance is an arrangement by which the insured, in consideration of a reduced rate, agrees to carry an amount of insurance equal to a percentage of the total value of the property insured.

An example is if you have guaranteed to carry insurance up to 80% or 90% of the value of your building and/or contents, whatever the case may be. If you don’t, the company pays claims only in proportion to the amount of coverage you do carry.

The following equation is used to determine what amount may be collected for partial loss:

 Amount of Insurance Carried x Loss = Payment Amount of Insurance that Should be Carried 

Example A

Mr. Right has an 80% co-insurance clause and the following situation:

 $100,000 building value $ 80,000 insurance carried $ 10,000 building loss 

By applying the equation for determining payment for partial loss, the following amount may be collected:

 $80,000 x $10,000 = $10,000 ------- $80,000 

Mr. Right recovers the full amount of his loss because he carried the coverage specified in his co-insurance clause.

Example B

Mr. Wrong has an 80% co-insurance clause and the following situation:

 $100,000 building value $ 70,000 insurance carried $ 10,000 building loss 

By applying the equation for determining payment for partial loss, the following amount may be collected:

 $70,000 x $10,000 = $8,750 ------- $80,000 

Mr. Wrong’s loss of $10,000 is greater than the company’s limit of liability under his co-insurance clause. Therefore, Mr. Wrong becomes a self-insuror for the balance of the loss– $1,250.