What is Co-Insurance?

Co-insurance is arguably one of most commonly misunderstood and confusing concepts in insurance. We want to help you understand by explaining what co-insurance is and how it works.

What is co-insurance?

Co-insurance is a clause used by insurance companies on policies covering property such as buildings, contents, stock, or industrial equipment. This clause makes sure policyholders insure their property to an appropriate value and that the insurer receives a fair premium for the risk, whether on a replacement cost basis or on an actual cash value basis (subject to depreciation). The co-insurance clause can also be found on business interruption policies where it ensures that policyholders insure their revenue stream to an appropriate value.

How does co-insurance work?

Generally, co-insurance is expressed as a percentage. The most common clauses require policyholders to insure to 80%, 90%, or 100% of the true value. For instance, a building valued at $1,000,000 replacement value with a co-insurance clause of 90% must be insured for no less than $900,000. The same building with an 80% co-insurance clause must be insured for no less than $800,000.

What if I choose to insure for less than the amount required by the co-insurance clause?

If a property owner chooses to insure for less than the amount required by the co-insurance clause, the property owner is essentially agreeing to retain part of the risk rather than transfer it to the insurance company. He or she thus becomes a ‘co-insurer’ and will share the loss with the insurance company according to a simple calculation.

Here are two examples that demonstrate how the clause works:

• Building Value $1,000,000
• Co-insurance Requirement 90%
• Required Amount of Insurance $ 900,000
• Actual Amount of Insurance $ 600,000
• Amount of Loss $ 300,000

The co-insurance formula is:

(Actual Amount of Insurance) * Amount of Loss = Amount of claim
(Required Amount of Insurance)

Inserting the amounts above in the formula produces the following calculation:

($600,000) * $300,000 = $200,000
($900,000)

So the owner absorbs a $100,000 co-insurance penalty. Since he chose to retain one-third of the risk himself rather than transfer it to the insurer, he absorbs one-third of the loss.

If the building had been insured to the amount required by the 90% co-insurance clause then the co-insurance calculation would look like this:

(Actual Amount of Insurance) * Amount of Loss = Amount of claim
(Required Amount of Insurance)

($900,000) * $300,000 = $300,000
($900,000)

In the second example, since the owner met the co-insurance requirement, he was not a coinsurer and his claim is paid without penalty.

Will insurance companies allow the deletion of the co-insurance clause?

Generally, insurers will not allow the co-insurance clause to be deleted. They want to ensure they receive a premium that fairly reflects the total reconstruction value of the property insured, and covers the risk assumed by the insurer. Under certain circumstances, an insurer will replace the percentage co-insurance clause with a “stated amount co-insurance” clause.

With the stated amount co-insurance clause, a pre-agreed value replaces the percentage amount. As long as the amount insured is not less than the amount agreed to, the property owner cannot become a co-insurer and won’t face the penalties created by underinsurance. If the property is insured for less than the agreed value, the stated amount co-insurance clause reverts to the standard 90% clause – and the potential for an underinsurance penalty returns.

To obtain the stated amount co-insurance clause, the policyholder must satisfy the insurer the amount of coverage is a fair approximation of the true cost. Normally, a “reconstruction appraisal” will be required. Market value or purchase price can be dramatically different from replacement cost. Relying on them can produce some nasty surprises following a loss.

When will the different co-insurance percentages be used?

80% is normally used for:

• Property insured on an actual cash value (depreciated value) basis.
• Stock in trade.
• Gross earnings business interruption.

90% is normally used for:

• Buildings and contents insured for replacement cost.
• Industrial equipment.

100% is normally used for:

• Profits business interruption.

There are other percentages and applications used. It is best to confirm with your local BrokerLink branch on how co-insurance might affect you. Your broker will advise you of the steps to take to ensure your property is insured to a fair value and you won’t end up on the wrong side of a co-insurance calculation.

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What insurance policies feature co-insurance clauses?

Co-insurance clauses are most commonly found in commercial insurance policies, specifically commercial property insurance policies. Depending on the policy, you might be required to insure 100% of the value. However, some policies allow you to insure less than that, such as 80% of the value. Further, the policyholder might be permitted to suspend their co-insurance clause for the term of the policy if they agree to add a stated amount endorsement (a stated or agreed amount endorsement is a provision in which the insurance company and the policyholder agree to an amount of insurance and consequently, the co-insurance clause will not apply if a loss occurs).

How do co-insurance and co-pay differ?

Although the two sound familiar, co-insurance and co-pay are not the same and cannot be used interchangeably. As mentioned, co-insurance is a clause used by insurance providers on some commercial policies that cover properties like buildings, inventory, or industrial equipment.

Co-insurance clauses are shared between the policyholder and the insurance company. With a co-insurance clause, the insurance company must calculate the amount of insurance the policyholder should have according to the co-insurance clause percentage (which can be anywhere between 0% and 100%). When the policyholder reaches their annual deductible, they will start paying co-insurance at the agreed-upon rate.

In contrast, co-pay is a flat fee paid for by the policyholder every time they file a certain type of claim (most often a medical claim). The policyholder does not need to reach their annual deductible for the co-pay to apply. The amount of co-pay is ultimately determined by several factors, like the type of claim and the insurance provider.

Co-Insurance FAQ's

What does 80% coinsurance mean?

80% coinsurance means the insurance company is responsible for 80% of any claims that arise and the customer is responsible for the remaining 20% plus the deductible.

What does 30% coinsurance mean?

30% coinsurance means the insurance company pays for 30% of an expense and the customer pays the remaining 70%.

Is it good to have 0% coinsurance?

This question is usually in reference to health insurance offered by your work. It means the insurance company pays for 100% of covered medical costs and the employee pays 0%. In this case, if you are the employee, then yes, it is good!

For more FAQs, visit the BrokerLink FAQs page.