Co-Insurance Clause

Co-insurance is a clause in an insurance policy that requires the insured to carry a certain percentage of insurance in relation to the actual value or replacement cost of the property insured.

The co-insurance clause is usually found in business and commercial insurance policies and is typically part of the building, contents, stock and/or equipment limit but can be found on other coverage as well.  Co-insurance percentages can be 80, 90 or 100 percent.

If the insured fails to insure to within the stated percentage of the actual value or replacement cost of the property, the insured can be penalized in the event of any insured loss.

Consider the example below.

The building limit of $300,000 must be within 90% of its actual value.  In this example, the insured value is adequate as long as the actual value is less than $333,333.  What happens if the actual value of the building was $600,000 and an insured loss in the amount of $10,000 occurs?  Since the building was insured to only 50% of the actual value, the insurance company would pay only $5,000 (50%) of the loss.

The insurance company’s calculation is DID INSURE ($300,000) over SHOULD HAVE INSURED ($600,000) times the AMOUNT OF THE LOSS ($10,000) = $5,000.

It is the responsibility of the insured to make sure that the property is insured to value.  An appraisal for the replacement cost may be required.

Why do insurance companies add the co-insurance clause?  First, the insurance company would like to receive adequate premium for the coverage provided.  More importantly, the limits of coverage are used by insurance companies to determine the amount of premium required to adequately cover losses.  If property was widely under-insured, the insurance company will not have charged enough premium to cover their losses.