Co-insurance is arguably one of most commonly misunderstood and confusing concepts in insurance. We want to help you
understand by explaining what co-insurance is and how it works.
What is co-insurance?
Co-insurance is a clause used by insurance companies on policies covering property such as buildings, contents,
stock, or industrial equipment. This clause makes sure policyholders insure their property to an appropriate value
and that the insurer receives a fair premium for the risk, whether on a replacement
cost basis or on an actual cash value
basis (subject to depreciation). The co-insurance clause can also be found on business interruption policies where
it ensures that policyholders insure their revenue stream to an appropriate value.
How does co-insurance work?
Generally, co-insurance is expressed as a percentage. The most common clauses require policyholders to insure to 80%,
90%, or 100% of the true value. For instance, a building valued at $1,000,000 replacement value with a co-insurance
clause of 90% must be insured for no less than $900,000. The same building with an 80% co-insurance clause must be
insured for no less than $800,000.
What if I choose to insure for less than the amount required by the co-insurance clause?
If a property owner chooses to insure for less than the amount required by the co-insurance clause, the property
owner is essentially agreeing to retain part of the risk rather than transfer it to the insurance company. He or she
thus becomes a ‘co-insurer’ and will share the loss with the insurance company according to a simple calculation.
Here are two examples that demonstrate how the clause works:
Building Value $1,000,000
Co-insurance Requirement 90%
Required Amount of Insurance $ 900,000
Actual Amount of Insurance $ 600,000
Amount of Loss $ 300,000
The co-insurance formula is:
(Actual Amount of Insurance) * Amount of Loss = Amount of claim
Inserting the amounts above in the formula produces the following calculation:
($600,000) * $300,000 =
So the owner absorbs a $100,000 co-insurance penalty. Since he chose to retain one-third of the risk himself rather
than transfer it to the insurer, he absorbs one-third of the loss.
If the building had been insured to the amount
required by the 90% co-insurance clause then the co-insurance calculation would look like this:
(Actual Amount of Insurance) * Amount of Loss = Amount of claim
(Required Amount of Insurance)
($900,000) * $300,000 = $300,000
In the second example, since the owner met the co-insurance requirement, he was not a coinsurer and his claim is paid
Will insurance companies allow the deletion of the co-insurance clause?
Generally, insurers will not allow the co-insurance clause to be deleted. They want to ensure they receive a premium
that fairly reflects the total reconstruction value of the property insured, and covers the risk assumed by the
insurer. Under certain circumstances, an insurer will replace the percentage co-insurance clause with a “stated
amount co-insurance” clause.
With the stated amount co-insurance clause, a pre-agreed value replaces the percentage amount. As long as the amount
insured is not less than the amount agreed to, the property owner cannot become a co-insurer and won’t face the
penalties created by underinsurance. If the property is insured for less than the agreed value, the stated amount
co-insurance clause reverts to the standard 90% clause – and the potential for an underinsurance penalty returns.
To obtain the stated amount co-insurance clause, the policyholder must satisfy the insurer the amount of coverage is
a fair approximation of the true cost. Normally, a “reconstruction appraisal” will be required. Market value or
purchase price can be dramatically different from replacement cost. Relying on them can produce some nasty surprises
following a loss.
When will the different co-insurance percentages be used?
80% is normally used for:
Property insured on an actual cash value (depreciated value) basis.
Stock in trade.
Gross earnings business interruption.
90% is normally used for:
Buildings and contents insured for replacement cost.
100% is normally used for:
Profits business interruption.
There are other percentages and applications used. It is best to confirm with your local
BrokerLink branch on how
co-insurance might affect you. Your broker will advise you of the steps to take to ensure your property is insured
to a fair value and you won’t end up on the wrong side of a co-insurance calculation.
What insurance policies feature co-insurance clauses?
Co-insurance clauses are most commonly found in commercial insurance
specifically commercial property insurance policies. Depending on the policy, you might be required to insure 100%
of the value. However, some policies allow you to insure less than that, such as 80% of the value. Further, the
policyholder might be permitted to suspend their co-insurance clause for the term of the policy if they agree to add
a stated amount endorsement (a stated or agreed amount endorsement is a provision in which the insurance company and
the policyholder agree to an amount of insurance and consequently, the co-insurance clause will not apply if a loss
How do co-insurance and co-pay differ?
Although the two sound familiar, co-insurance and co-pay are not the same and cannot be used interchangeably. As
mentioned, co-insurance is a clause used by insurance providers on some commercial policies that cover properties
like buildings, inventory, or industrial equipment.
Co-insurance clauses are shared between the policyholder and the insurance company. With a co-insurance clause, the
insurance company must calculate the amount of insurance the policyholder should have according to the co-insurance
clause percentage (which can be anywhere between 0% and 100%). When the policyholder reaches their annual
deductible, they will start paying co-insurance at the agreed-upon rate.
In contrast, co-pay is a flat fee paid for by the policyholder every time they file a certain type of claim (most
often a medical claim). The policyholder does not need to reach their annual deductible for the co-pay to apply. The
amount of co-pay is ultimately determined by several factors, like the type of claim and the insurance
What does 80% coinsurance mean?
80% coinsurance means the insurance company is responsible for 80% of any claims that arise and the customer
responsible for the remaining 20% plus the deductible.
What does 30% coinsurance mean?
30% coinsurance means the insurance company pays for 30% of an expense and the customer pays the remaining
Is it good to have 0% coinsurance?
This question is usually in reference to health insurance offered by your work. It means the insurance
for 100% of covered medical costs and the employee pays 0%. In this case, if you are the employee, then yes,
For more FAQs, visit the BrokerLink FAQs page.