insurance

Coinsurance Clause

A provision in property insurance that requires the policyholder to maintain insurance coverage equal to a specified percentage of the property's value (typically 80-90%) to receive full benefits. If the property is underinsured below this percentage, the policyholder becomes a co-insurer and must pay a portion of any loss, even if the loss is small.

Example

“When fire damaged Tom's $500,000 building that had an 80% coinsurance clause, his $300,000 coverage left him underinsured, so he only received $15,000 of the $20,000 claim because he violated the coinsurance requirement.”

Memory Tip

Think 'Coinsurance = Co-pay penalty' - if you don't insure enough of the property's value, you become a co-insurer and pay part of every loss.

Why It Matters

Coinsurance clauses can result in significant out-of-pocket expenses even for partial losses if property is underinsured, making it crucial to maintain adequate coverage limits. This provision helps keep insurance premiums affordable by ensuring policyholders don't intentionally underinsure properties while expecting full coverage for small losses.

Common Misconception

Many property owners think that as long as their insurance coverage exceeds the amount of a loss, they'll be fully covered, not realizing that underinsuring their property relative to its total value triggers coinsurance penalties. They also often confuse this with health insurance coinsurance, which is a completely different concept involving percentage cost-sharing after deductibles.

In Practice

Sarah owns a $1,000,000 building with an 80% coinsurance clause but only carries $600,000 in coverage instead of the required $800,000. When she suffers a $100,000 fire loss, the insurance company applies the coinsurance formula: ($600,000 ÷ $800,000) × $100,000 = $75,000. Sarah receives only $75,000 and must pay the remaining $25,000 out-of-pocket, despite the loss being well within her coverage limit.

Etymology

Combines 'co-' meaning together with 'insurance,' indicating shared risk between insurer and insured, with 'clause' from Latin 'clausula' meaning a closing or stipulation in a contract.

Common Misspellings

co-insurance clausecoinsurace clausecoinsurance clausco insurance clause

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Other insurance terms you should know

deductibleThe amount you pay out-of-pocket before your insurance begin…insurance premiumThe amount paid periodically to an insurance company in exch…deductibleThe amount a policyholder must pay out of pocket before insu…copayA fixed amount paid by an insured person at the time of a me…coinsuranceA cost-sharing arrangement where the insured pays a percenta…out-of-pocket maximumThe most an insured person will pay for covered healthcare s…