Insurance to Value: Explaining Co-Insurance
When you apply for an insurance policy, you are being proactive about protecting yourself against potential losses or damages to your property. What most people may not realize, is that when you apply for insurance you also determine a co-insurance clause.
What is co-insurance?
Co-insurance is a clause that ensures your property is evaluated appropriately to receive fair coverage in a claim situation. The property should be insured to the percentage of either the Replacement Cost or Actual Cash Value that is stated in the policy declaration pages, usually 80%, 90%, or 100%.
How does it work?
If you have insured your property to match the percentage in your policy, then you will receive more adequate or potentially full compensation, up to the amount of coverage subject to the applicable deductible or other limitations outlined in the policy.
However, if you choose to co-insure for less than what is stated, for example only 50% of the stated Replacement Cost or Actual Cash Value, then the insurance company would only be responsible for 50% of the loss in the case of a claim – making you responsible to pay out the remaining half.
The co-insurance formula
Here’s an example: The Replacement Cost or Actual Cash Value is $20,000 and you decide to co-insure for $18,000 (90%). They you experience a situation where you have to file a claim with losses and damages coming out to $12,000. Following the formula, you could be covered for $10,800 (90%) – depending on the coverage subject to the applicable deductible or any other limitations outlined in the policy, you will be covered adequately.
However, in this case if you had only co-insured up to 50% and experienced the same loss and damages coming out to $12,000, then, following the same formula, you could only be covered for $6,000. Nearly $4,000 less!
Does this really benefit me?
Yes! Making sure your co-insurance clause is near the suggested amount can seem high at first, but in the event of a loss or damages, being proactive and insuring your property as close to its true value as possible could save you in the end.