Coinsurance has different meanings depending on the type of insurance policy where it’s being used. It’s kind of like the word “HOT”. One might get excited about the “hot” deals while someone else may know better! When it comes to coinsurance, be sure to “know better”!
For Medical Insurance, coinsurance is the percentage that the policyholder would pay toward the bill for services received. So, if you have an X-Ray that costs $200, and your coisurance is 20%, then your out of pocket cost for the x-ray is $40 (once you have satisfied any deductible and assuming you are below your out of pocket maximum.)
We all know that the kettles below are “HOT!”
And for Commercial Building Insurance policies, “coinsurance” has a very different meaning than for “coinsurance” in the Medical insurance context.
The amount of Coinsurance is once again expressed as a percentage but the amount of coinsurance paid could be $0, OR it could be a lot! But How? The policyholder only becomes a co-insurer when the limit of insurance purchased is below the percentage required by the policy and is shown on the policy declarations page.
Confusing? Yes it is.
Consider this example– you insure your Restaurant Building for $1,000,000 and let’s say it costs $1,000,000 to replace the entire building at the time of a $300,000 kitchen fire loss. And let’s say the insurance policy that you purchased has a 90% coinsurance clause. Good news! You have met the requirement because you needed to purchase at least $900,000 worth of insurance to meet the coinsurance requirement ($1,000,000 cost to replace entire building at time of loss * 90% coinsurance = $900,000 minimum amount of insurance to meet requirement). In this example, you are NOT a co-insurer in this loss. You will be paid $300,000 less your deductible.
However, let’s twist this around and suppose the kitchen fire loss was $300,000 but you had only purchased $600,000 worth of insurance on the same building. You might be thinking that you’re fully covered because the $600,000 of coverage is more than the amount of the $300,000 loss. Right?
NOPE! Since the coinsurance clause is 90% meaning you should have purchased $900,000 of coverage to meet the requirement. You only purchased $600,000, so the $300,000 loss will not be fully covered. Really? Yes, here’s how the formula for loss payment works:
Amount of insurance that you purchased is DIVIDED BY Amount of insurance that you should have purchased to meet the coinsurance requirement
$600,000/$900,000 = 66.66%
The insurance company will pay $300,000 * 66.66% or $199,980 (less any deductible) on your $300,000 loss! Yikes – This is not “HOT!” We agree!
We advise not purchasing building insurance with “coinsurance” language whenever possible. For more information, please call us with your Business Insurance questions and free quotes today.
