Today, we’re helping you solve that problem by explaining everything you need to know about coinsurance clauses in home insurance policies.
Most Property Insurance Policies Contain Coinsurance Clauses
First, having a coinsurance clause on your home insurance policy is not unique. Most property insurance coverage forms contain coinsurance clauses.
These clauses require the insured individual to carry an amount of insurance equal to or greater than the stated coinsurance percentage of the insurable valuable of the protected property.
In other words, you can’t have cheap insurance on an expensive home and expect your insurer to completely cover the costs.
Why Does Coinsurance Exist?
Coinsurance may sound like a complex concept, but it’s actually straightforward.
The coinsurance clause is in place to encourage insured individuals to carry an appropriate amount of insurance relative to the value of their property. This is particularly important on replacement cost policies.
Basically, it prevents the insured individual from saving premium dollars by deliberately insuring less than the specific coinsurance percentage of the subject risk. If they do this, then they become coinsurers for the loss.
In layman’s terms, this means you can’t have $100,000 in insurance coverage on a $200,000 house. If you do, and your house requires $200,000 in total replacement costs, then the coinsurance clause may kick in. That means any losses are now subject to a coinsurance calculation.
On the other hand, if someone has a $200,000 house and buys $200,000 in replacement cost coverage, then the insurance company will pay the insured individual’s losses at 100% up to the policy limit, and no coinsurance clause will kick into effect.
In layman’s terms, a coinsurance clause forces the insured individual to have a stake in the game.
How Do Coinsurance Clauses Work?
Coinsurance clauses essentially deduct a percentage from your claim. The clause outlines a coinsurance percentage, and you ultimately get paid less for your losses than if you had the adequate amount of coverage.
CGBGgroup.com has the specific formula used by many insurance companies. The formula involves taking the limits, risk value, coinsurance percentage, and covered loss and using this information to calculate the maximum loss payment available.
Ultimately, in the case of the homeowner listed above who only had $100,000 in replacement cost coverage on a $200,000 home, the ultimate payout could be as little as half of the $100,000 in coverage, or $50,000.
Coinsurance clauses vary between insurance agencies, so the specific numbers and covered amounts will change. Typically, if your insurance policy is less than 80% of your home’s replacement value, then the coinsurance clause will come into effect.
Can You Fight Back Against A Coinsurance Clause?
If you’re fighting back against a coinsurance clause, it’s common to hire a public adjuster. You can fight back against a coinsurance clause, but you typically need a lawyer or insurance expert on your side.
Every day, insurance brokers across America are exposed to litigation relating to the ramifications of the coinsurance clause on a covered loss. Most litigation revolves around the following three complaints:
1) Failing to advise that the policy contained a coinsurance provision
2) Failing to advise an appropriate insurance limit to avoid a coinsurance penalty
3) Failing to explain how the coinsurance provision in the contract would affect claim payments
Basically, if the insurer just throws the coinsurance clause at you without adequately explaining what it means, then you could have a case to fight back against your insurer. Just like with most contracts, they have to make it easy for you to understand exactly what you’re signing up for (even if you didn’t carefully read every line of the contract).
How to Avoid A Costly Coinsurance Penalty
The best way to avoid a costly coinsurance penalty – or to fightback against an existing penalty – is to talk to a public adjuster or claims adjuster. These professionals make a living out of defending homeowners against dishonest insurance agencies.
If you’re in a dispute with your insurer over a coinsurance clause, then a public adjuster – or a lawyer – is your best option. These issues can get messy and complicated and you need someone who understands the law on your side.
Ultimately, a coinsurance clause gives your insurer the ability to penalize you by reducing the amount of your claim payment if you’re caught with inadequate insurance for the value of your property. In an ideal situation, it prevents homeowners from having a $100,000 insurance policy on a $200,000 home.
However, some insurers will abuse this clause and try to activate the coinsurance clause in situations where it does not actually apply – in which case it may be in your best interests to hire a public adjuster.