There are many misconceptions about co-insurance and what it actually is. When you hear the term “co-insurance,” you might have many questions. That’s why we’re here with our guide to co-insurance to help you learn everything you need to know about it.
Understanding co-insurance
A co-insurance clause is a term insurance companies use when covering property, such as buildings, contents, stock or industrial equipment. The clause allows property owners to receive a fair premium for the risk — this can be done on a replacement cost basis or on a cash value basis (subject to depreciation). The co-insurance clause can also be listed in business interruption policies, which allows policyholders to insure their revenue stream to an appropriate value.
A co-insurance clause within your insurance coverage is common if you own multiple commercial properties. This is especially true if you own expensive buildings that have high replacement values. That’s because the name says it all, and you share the responsibility with your insurance company if something were to happen. Next, we will go more into depth about how co-insurance contracts work.
How does co-insurance coverage work?
When referencing co-insurance, it’s usually expressed as a percentage. The most common clauses require policyholders to insure 80%, 90% or 100% of the true value. For example, if a building has a $1 million replacement value and a co-insurance clause of 90%, it cannot be insured for less than $900,000. If the same building has an 80% co-insurance clause, it must not be insured for less than $800,000.
Policyholders insure based on how much they can afford. If something happens to their property, they will have to pay what their insurance company doesn’t. It works a little differently from high-value home insurance, which usually just asks the policyholder to pay a deductible. Similar to going without business insurance in Ontario, you are taking a risk when you have a co-insurance clause. In the next section, we will discuss how to calculate co-insurance clauses and potential penalties for underinsurance.
What happens if I choose to insure for less than the amount required by the co-insurance clause?
If a property owner opts to insure for less than the amount outlined in the co-insurance clause, they agree to retain part of the risk instead of transferring it to the insurance company. When this happens, the policyholder becomes a “co-insurer,” which means they will share the loss with the insurance company using a simple calculation. Here are two examples that show how co-insurance clauses work:
- 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)
Basically, the policyholder absorbs a $100,000 co-insurance penalty. Since they decided to retain one-third of the risk instead of transferring it to the insurer, one-third of the loss is absorbed.
Here’s another example. This time, the building has to be insured by the 90% co-insurance clause. Here’s how the calculation works:
(Actual Amount of Insurance) * Amount of Loss = Amount of claim (Required Amount of Insurance)
($900,000) * $300,000 = $300,000 ($900,000)
This time, the policyholder met the co-insurance requirement. As a result, they were not a co-insurer and the claim was paid without penalty. Having good risk management skills is of utmost importance in these situations because you are taking your chances when this clause is listed on your certificate of insurance. If you aren’t careful, you will be stuck paying a replacement cost much higher than what you would ever ask for. Next, we will learn about whether or not co-insurance can be removed from a policy.
Will insurance companies allow the deletion of the co-insurance clause?
In most cases, your insurance provider will not let you delete co-insurance. That’s because your insurance company wants to ensure they receive a premium that reflects the total reconstruction value of the insured property. When you start paying co-insurance, you are covering the risk assumed by the insurer. Sometimes, your insurance company will replace the percentage co-insurance clause with a “stated amount co-insurance” clause.
The difference with a stated amount co-insurance clause is that a pre-agreed value replaces the percentage amount. The policyholder won’t be a co-insurer if the amount insured is not less than the amount agreed to. When the property is insured for less than the agreed value, the stated amount of the co-insurance clause changes back to the standard 90% clause. As a result, the underinsurance penalty will return.
In order to get the stated amount in the coinsurance clause, the policyholder has to ensure the amount of coverage is a fair approximation of the true cost in the eyes of the insurance company. This often requires a “reconstruction appraisal.” Remember that the market value or purchase price is not the same as the replacement cost. Avoid relying on them following loss, or you could make an expensive mistake. It’s one that is much worse than an insurance premium increase.
When will the different co-insurance percentages be used?
Depending on your insurance company and policy, the percentage your co-insurance plan has will often vary. This is completely normal. Below, we break down what each percentage is used for to help you better understand the purpose of co-insurance:
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 are insured for replacement cost.
- Industrial equipment.
100% is normally used for:
- Profits business interruption.
These three are examples — sometimes, other percentages and applications are used. Confirm with your local BrokerLink branch to better understand how co-insurance can affect you. Your broker will walk you through the steps of ensuring your property is insured for a fair value to prevent you from ending up on the wrong side of a co-insurance calculation.
What insurance policies use co-insurance clauses?
Co-insurance clauses are often found in commercial insurance policies, usually commercial property insurance policies. Depending on the policy, you may have to insure 100% of the value. Others only require 80%. The policyholder may be able to suspend their co-insurance clause for the term of the policy upon agreeing to a stated amount endorsement. The amount has to be agreed upon for it to be valid, and if this happens, the co-insurance clause will not apply if a loss occurs.
How do co-insurance and co-pay differ?
These terms sound similar, but don’t let that fool you! Co-insurance and co-pay are not terms you can use interchangeably. As discussed, co-insurance is a clause used by insurance providers to cover commercial properties such as buildings, industrial or equipment.
Co-insurance clauses are shared between the policyholder and the insurance company. When a co-insurance policy is in place, the insurance company calculates the amount of insurance the policyholder should have according to the clause percentage, which ranges from 0% to 100%. When the policyholder reaches their annual deductible, they have to start paying co-insurance at the agreed-upon rate.
On the other hand, a co-pay is a flat fee paid by the policyholder each time they file a certain type of claim, most often a medical claim. The policyholder is not required to reach their annual deductible for co-pay to apply. The amount of co-pay required depends on factors like the type of claim and insurance provider.
Contact BrokerLink today
If you aren’t familiar with having a co-insurance clause, you could easily be taken advantage of. That’s why you need a broker to help you out. At BrokerLink, we advocate for customers to help them get a co-insurance clause that’s fair and affordable. It doesn’t matter what type of commercial property you are looking to insure.
We are here for you whether you have questions about co-insurance or need a broker for home insurance. We understand vast topics such as third-party liability insurance as well. When you choose a Brokerlink, we leave no stone unturned. What are you waiting for? Call, use our online quote tool or visit one of our community branches across Canada today.
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Coinsurance FAQs
What does 80% co-insurance mean?
80% co-insurance means the insurance company has to pay for 80% of all claims that arise. The customer has to pay the remaining 20% and the deductible.
What does 30% co-insurance mean?
30% co-insurance is when the insurance company pays 30% of an expense. The customer has to pay the remaining 70%.
Is it good to have 0% co-insurance?
This scenario only applies to health insurance offered through your work. This means that the insurance company pays 100% of the covered medical costs, and the employee pays 0%. In this case, if you are an employee, it is good!
For more FAQs, visit the BrokerLink FAQs page.
If you have any questions, contact one of our local branches.
