Imagine that you had roof damage due to to thunderstorms coming through your area. The cost to repair the damage comes to $20,000. No problem. You have insurance for this, right? Yet, when you make a claim you are informed that your payout is only $12,000, leaving you to pay the additional $8,000 out of pocket to fix your roof. What happened???
You’ve just been hit by your coinsurance clause.
What is Coinsurance?
Coinsurance in the context of health insurance is fairly commonly understood. After paying your co-pay (the base amount required by your policy), the balance of your medical treatment in a coinsurance policy is divided between you and your health insurance. If they pay 80%, you pay 20%. If they pay 90%, you pay 10%.
However, while the concept of your insurance only paying a portion of a claim, stands true with property policies, coinsurance in a property policy is often misunderstood. It’s basically a promise between you and your insurer that your policy represents an accurate value for your home. If that value is inaccurate, then a penalty is incurred, leading to only partial payment on claims.
Do I have a Coinsurance Clause?
If you’ve ever looked at your policy for your property insurance and found a percentage of 80%, 90% or 100% by the limits on the property insurance policy declarations page, you may have a Coinsurance Clause. This means that you are betting on the replacement value you selected at the time of insurance being (80%, 90%, or 100%) accurate. The higher the percentage the less leeway you have in your policy and the greater the penalty if you did not select a sufficient limit.
Why do Coinsurance Clauses Exist?
Of course, insurance companies have good reason for making sure the values are commensurate with the premiums. For example, if a premium is based upon a value of $40 per square foot and the actual replacement cost of your home was $100 per square foot, the insurance company would be taking on a much higher level of risk than the insured was paying for them to take on. In this situation, an insurance company could also claim fraud, endangering the payout of your claim entirely.
What Should a Homeowner do About it?
Meet with an insurance professional. Get your actual property details and policy in front of an expert that can give you recommendations. Have a replacement cost appraisal, making certain that it isn’t a market value or resale appraisal but rather an estimate of what it would cost to replace your home in the event of a total loss. Make sure your coverage meets the coinsurance requirement or talk to your agent about endorsements that could replace coinsurance.
Compass Insurance Partners agents are happy to look through all of the details to make sure your insurance does what it’s supposed to do…protect you.