COINSURANCE
A provision of an insurance policy that provides
that the insurance company and the insured will
apportion between them any loss covered by the
policy according to a fixed percentage of the value
for which the property, or the person, is insured.
Insurance is intended to spread the risk of
any loss among every insured who purchases a
particular type of policy from an insurance
company and the company itself. The likelihood
that every policyholder will suffer the loss that
has been insured against is slim, and, therefore,
an insurance company should be able to com-
pensate those who have losses, if those policy-
holders have complied with the terms of their
policies.
Coinsurance divides the risk of loss accord-
ing to the amount of insurance purchased by
each person through the payment of premiums.
The size of insurance premiums is based prima-
rily upon the value of the property covered by
the policy. If a person fails to insure a property
for an amount close to its actual cash value or
replacement cost, then the person must accept a
greater share of the risk of loss than someone
who pays larger premiums to insure his or her
property for an amount close or equal to its
actual value.
In insurance policies for fire or water dam-
age the coinsurance clause provides that prop-
erty must be insured for a specific percentage,
usually 80 percent of its actual cash value. The
80 percent provision is known as the New York
Standard Coinsurance Clause. The owner of the
property is liable for the remaining 20 percent of
its actual cash value. If the insured party’s prop-
erty is only partially damaged, that person’s
recovery under the policy will be reduced in
proportion to the amount of loss suffered.
For example, a homeowner has a $120,000
fire insurance policy on her home, which is val-
ued at $150,000. The woman’s coverage is 80
percent of the home’s actual cash value. If her
house is completely destroyed by a fire that is
not ARSON, she will recover $120,000, which is
the full face amount of the policy. She is respon-
sible for the remaining 20 percent of its actual
cash value, or $30,000. If a fire caused only
$20,000 worth of damages, the homeowner
could recover only $16,000, or 80 percent of the
loss. The homeowner is a coinsurer for the
remaining $4,000, or 20 percent of the replace-
ment cost of the property.
If that homeowner has purchased only
$36,000 worth of fire insurance, or 60 percent of
replacement costs, thereby paying a lower pre-
mium than a policy with coverage for $48,000,
she would be responsible for a larger share of the
damages incurred in the total or partial destruc-
tion of the property. The total destruction of the
$60,000 house will result in a recovery limited to
the amount of insurance bought by the home-
owner, or $36,000. She is responsible for 40 per-
cent of replacement costs. The recovery for the
partial loss of $20,000 will be $12,000, or 60 per-
cent of the loss, since recovery is reduced pro-
portionately by the amount of actual loss.
Although insurance policies stipulate a spe-
cific percentage of loss that must be covered, an
insured may purchase maximum insurance cov-
erage for up to 100 percent of the replacement
cost of the property covered by the policy. The
premiums for such protection will be propor-
tionately larger than the one for 80 percent of
the property’s actual cash value.
Coinsurance clauses in fire or water damage
policies encourage property owners to purchase
full or nearly full coverage. It is important for
policyholders to periodically review their insur-
ance policies to verify that their coverage ade-
quately protects the value of their property.
In medical or HEALTH INSURANCE policies,
coinsurance has a similar meaning. The amount
of expenses that a medical insurer will reim-
burse a policyholder is a fixed percentage—usu-
ally 80 percent—of the approved charges—the
amount of a submitted bill which the insurer
considers reasonable and will reimburse after
the policyholder has paid the deductible, which
is usually the first $100 of medical expenses. The
insured becomes a coinsurer for the remaining
20 percent of the approved charges as well as for
the amount by which the individual medical bills exceed the approved charges.
