What is a Co-Insurance Clause?


Co-insurance is a very important term when considering a new insurance policy. Most of the time you will encounter co-insurance on business policies, but it’s also possible to see co-insurance applied to personal insurance as well.

Co-insurance is an often-misunderstood term and even some insurance professionals struggle with remembering the ins and outs of the clause.

With this article we hope to demystify the clause, and to help you make better decisions about your insurance coverage.

What is Co-Insurance?

Co-insurance is a provision that limits the loss recovery if the amount of insurance purchased by the insured (you) is less than a specified percentage of the value of the property. You will often see the percentage range from 80% to 100% of the value of the asset being insured.

That is a fancy way of saying that the insurance company will apply the co-insurance clause to make sure that the policyholders insure their property to an appropriate value so that the insurer receives a fair premium for the risk.

Real Life Co-Insurance Example

The concept of co-insurance is not an easy one to grasp, but it is usually best explained with an example.

You have a co-insurance clause on your property requiring at least 80% of the total value of the property to be insured. The value of the property is $1,000,000, but you have only insured the property for $400,000. This means that you are only insuring 40% of the value of the property (half of the co-insurance requirement)

There was an insurable loss in the amount of $50,000 and you have put in a claim. Since you only carried 50% of the co-insurance requirement, the insurance company will cover only 50% of the loss. This means that the insurance company would only pay out $25,000 of the $50,000 loss.

You are essentially co-insuring your property with the insurance company. You were responsible for the half that you didn’t insure, and they were responsible for the half that you did insure.

What is the Calculation for Co-Insurance?

The way that co-insurance is calculated is using a specific formula. Using the values from the example above, this is what the formula would look like:

($400,000 / $800,000) * $50,000 = $25,000

Written out, the formula is the amount of insurance purchased ($400,000) divided by the amount of insurance you should have purchased ($800,000 (80% of 1 million value)) multiplied by the value of the loss ($50,000).

What is the Point of Co-Insurance?

The co-insurance clause is put on the policy to encourage the full valuation of the property and to discourage under-insurance.

Keep in mind that the co-insurance clause can be applied to buildings, stock, profits from business interruption, or even equipment.

Insurance Can be Complicated

Co-insurance is a great example of how complicated insurance can be at times. The good news is that you don’t have to understand these things to the extent that your insurance broker does. Having an experienced and knowledgeable insurance broker can make your life a lot easier.

If you don’t already have an insurance broker helping you find the coverage you need, reach out to our offices today.