The Co-Insurance Clause is a common clause found on property policies that many policyholders aren’t aware of. It’s important because it affects the amount payable in the event of a claim.
The clause states that the policyholder must purchase an insurance limit equal to or greater than a certain percentage of the property’s total value. This percentage typically ranges from 80% to 100% depending on the insurance company and the type of property being insured.
For example, let’s say we have a farmer whose barn’s true value is $500,000. Her policy has a co-insurance clause of 80%. This means she is required to insure her barn for at least 80% of its true value. Since the barn’s true value is $500,000, the minimum required limit of insurance is $400,000.
If a policyholder insures their property for less than the specified co-insurance percentage, they will face a financial penalty in the event of a loss.
Continuing with our farmer, let’s say she has only purchased an insurance limit of $250,000 for her barn, despite the minimum requirement of $400,000. To make matters worse, a small fire has now broken out and damaged the barn. The loss amount is $200,000.
To determine how much the company will payout on a loss, the following formula is used:
Limit Purchased x Loss Amount = Amount Payable
If we take the farmers information and plug it into our formula:
($ 250,000) x $ 200,000 = $ 125,000
This means the insurance company will pay $125,000 of the $200,000 loss, and our farmer is responsible for the additional $75,000. Had our farmer purchased a minimum of $400,000 insurance for her barn, the company would have paid out the full $200,000 to cover the loss.
All policyholders should review their policy to determine what co-insurance percentage is stated and whether their property is being insured to its true value. Don’t wait until you’ve had a loss to find out you’re not properly insured. Call your broker today.