Coinsurance

Coinsurance can mean two different things:

1. Property coverage provision set by your insurer. Your property insurance policy might have a coinsurance clause that requires you to carry coverage for a certain percent of your property's value. That way, your insurer can be sure you have adequate coverage if you need to make a claim.

2. Insurance that is provided by more than one insurance company. When two or more insurance providers jointly cover a person or entity, their coverage is called coinsurance.

For small business insurance, the first definition is the one that usually applies. If you see the term in a policy, it is most likely a property insurance provision that requires you to insure your business property to 80 percent of its value. If you insure your property for less than that required amount, your insurer may reduce the amount it pays on a claim.

Also, coinsurance in business insurance isn't the same as health insurance coinsurance. Instead of paying a portion of every claim, you only face a penalty if your property is underinsured.

Coinsurance doesn’t only apply to buildings and equipment. If you have business income coverage (also called business interruption insurance), which is often included in a business owner’s policy (BOP), a coinsurance requirement may apply there too.

The threshold is typically based on your projected annual income and expenses. Underinsuring this type of coverage can reduce your payout after a major disruption.

Your policy includes a coinsurance percentage. This number tells you how much of your property’s value you must insure to avoid a penalty in the event of a loss.

For example, if your property is worth $500,000 and your policy has an 80-percent coinsurance requirement, you must carry at least $400,000 in coverage. If you insure below that amount, your insurer may only pay a portion of your claim.

If you experience a loss and your coverage limit is lower than required, insurers use a standard formula to determine how much they will pay:

Insurance carried ÷ Insurance required × Amount of loss = Claim payout

So, for example, imagine you run a small photography studio. You estimate your equipment is worth $100,000, but its actual value is closer to $150,000. Your policy requires you to insure 80 percent of its value—which is actually $120,000—but you only insured $100,000.

A fire destroys $60,000 worth of equipment.

• Insurance carried: $100,000
• Insurance required: $120,000
• Calculation: $100,000 ÷ $120,000 = 0.83
• Payout: 0.83 × $60,000 = $49,800

You’d be responsible for the remaining $10,200.

Not every insurance company includes a coinsurance clause in its policies. However, those that do require coinsurance typically have three reasons for doing so:

To ensure clients have adequate coverage. This is perhaps the most important. With insurance, you may not want to invest enough money to cover all of your assets, but if you ever need coverage, you’ll be happy you have adequate protection.

To protect their pool of resources. If your business has lots of assets, it has lots of opportunities for damages that lead to an insurance claim. Requiring you to buy insurance that matches your risk exposure means the insurance provider is better equipped to handle real-world claim situations.

To encourage accurate assessment and underwriting. When you’re required to meet coinsurance limits, you’re more likely to make an accurate assessment of the value of your assets, which benefits the insurance provider (and you) in the long term.

When you apply for coverage through Insureon, our insurance specialists can answer questions about your property insurance policy and its coinsurance requirements.

Insureon helps small business owners compare business insurance quotes with one easy online application. Start an application today to select the right policy limits for your risk exposures.