Coinsurance Clause
In real estate insurance, a coinsurance clause is a provision found in property insurance policies that requires the policyholder to maintain coverage for a specified percentage of the property’s value, typically expressed as a percentage of the property’s replacement cost. The purpose of the coinsurance clause is to encourage policyholders to adequately insure their properties to avoid being underinsured in the event of a loss.
Under a coinsurance clause, if the policyholder fails to maintain coverage equal to or greater than the specified percentage of the property’s value, they may be subject to a penalty in the event of a claim. This penalty is calculated based on the difference between the actual amount of insurance carried by the policyholder and the required amount of insurance, relative to the property’s value.
For example, if a property has a replacement cost of $1,000,000 and the coinsurance clause requires the policyholder to maintain coverage for 80% of the property’s value ($800,000), but they only carry $600,000 in coverage, they are considered underinsured. In the event of a covered loss, the insurance company may apply a coinsurance penalty, reducing the amount of the claim payout proportionally to the degree of underinsurance.
Coinsurance clauses are designed to promote fairness and risk-sharing between policyholders and insurers by ensuring that policyholders contribute their fair share of the risk. They also serve to protect insurers against adverse selection, where policyholders might intentionally underinsure their properties to reduce premiums, only to file large claims later.
Policyholders should carefully review their insurance policies, including any coinsurance clauses, to understand their coverage requirements and obligations. It’s important for property owners to maintain adequate insurance coverage to protect their investment and avoid potential coinsurance penalties in the event of a loss.
