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What is co-insurance?

Co-insurance is one term that is frequently misunderstood yet often found in many insurance policies. It’s important to understand what it means because it has a direct impact on your coverage and how your policy responds if a claim is triggered.

What Co-Insurance Is and How It Works

Co-insurance is a requirement for you to insure your property to a specified percentage of its full replacement value. If an insured loss occurs and the co-insurance requirement is not met, you will have a co-insurance penalty. This helps ensure your property is properly insured and that premiums are fair.

This clause is commonly found on personal, commercial and farm property insurance policies, and on occasion attached to corresponding business interruption coverages.

For example, let’s say you’re a business owner who has insured a small building and its contents, including equipment and materials. Unfortunately, a fire causes a large loss. While you’re covered in this situation, there are two claim outcomes dependent on co-insurance.

  • Building and Contents Value – $400,000
  • Co-Insurance Requirement – 80%
  • Minimum Required Amount of Insurance – $320,000
  • Amount of Loss – $350,000

Scenario 1 – You insured your building for a value of $375,000. You met the co-insurance requirement and you’re covered.

Scenario 2 – You only insured your property to a value of $200,000. You have not met the co-insurance requirement and the clause is activated. You would receive a co-insurance penalty.

The co-insurance penalty is calculated as follows:

(Actual Amount of Insurance) * (Amount of Loss) / (Required Amount of Insurance) = Amount of claim to be paid by the policyholder.

In this case, you would be responsible for $218,750 of the $350,000 claim while insurance would cover $131,250 of the damage.

While co-insurance won’t affect you until you have a claim, you need to ensure the co-insurance requirement is met when you insure your property to avoid the penalty. You’ll also need to regularly review your valuations to ensure everything is properly insured.

It’s always best to insure your property to 100% of the replacement cost value!

Frequently Asked Questions About Co-Insurance

What is a normal co-insurance requirement?

Generally, co-insurance requirements are expressed as a percentage of the full replacement value. Commonly, you’ll see 80%, 90% and 100% co-insurance requirements. The percentage required will depend on your individual policy.

If you have a building valued at $1.5 million and co-insurance requirement is 80%, you would need to insure that building for a minimum of $1.2 million. If the co-insurance requirement was 90%, the building would need to be insured to a value of $1.35 million.

Do all policies have a co-insurance clause?

No, not all policies have a co-insurance clause. It’s often found on commercial property and business interruption extensions.

Does my policy have a co-insurance requirement?

You will need to check your policy documents or speak to your broker or insurance company to determine if your policy has a co-insurance requirement.

Do I have to meet the co-insurance requirement?

If you do not meet the co-insurance requirement, you essentially become a co-insurer and assume more risk on your property. This is the co-insurance penalty and will impact you if you have an insured loss.

The co-insurance penalty is calculated as such:

(Actual Amount of Insurance) * (Amount of Loss) / (Required Amount of Insurance) = Amount of claim to be paid by the policyholder.

If you have less than the required amount of insurance, you will pay more out of pocket to cover the damages. You will essentially be self-insuring a portion of your risk.

What impacts co-insurance values?

The value of your insured property impacts the co-insurance values. It is essentially the cost to repair or replace your property. Keep in mind that this can be affected by:

  • The cost of labour.
  • The cost of construction materials.
  • Upgrades or renovations done to your building.
  • By-laws or building code enhancements or changes.
  • The purchase of new equipment.
  • The presence of additional materials or inventory.

In the case of a business interruption cover policy with a co-insurance clause, it can be affected by:

  • Change in revenue.
  • Change in pricing.
  • Increasing costs (transportation, raw materials, et cetera).

Speak to your broker about your co-insurance requirements and regularly review the valuation of your property.