What is 90% Coinsurance in Property Insurance?

Property insurance helps protect homeowners and businesses from financial losses due to damage to their property. Most property insurance policies contain a coinsurance clause, which requires the policyholder to insure their property to a specified percentage of its replacement value. But what exactly does a 90% coinsurance requirement mean?

This article will explain what 90% coinsurance is, how it works, its purpose, pros and cons, and examples of how it affects claim payments.

What is Coinsurance in Property Insurance?

Coinsurance is an agreement between the insurance company and the policyholder to share losses in the event of a claim. With coinsurance, the policyholder agrees to insure their property to a stated percentage of its replacement cost value, usually 80%, 90%, or 100%.

If at the time of loss, the property is not insured to the agreed upon percentage, the insurance company will only pay a proportional share of the claim based on how much insurance the policyholder did purchase. This proportional payment is determined using a coinsurance formula.

The concept behind coinsurance is to encourage policyholders to properly insure their full property value. It aims to prevent people from buying less coverage than they need just to save on premiums.

How Does 90% Coinsurance Work?

A 90% coinsurance clause means the policyholder must insure their property to at least 90% of its estimated replacement cost.

• For example, if a home is valued at $500,000 to rebuild, with a 90% coinsurance requirement the minimum amount of coverage needed is $450,000.

If at the time of a loss the home is only insured for $400,000, then the insurance company will only pay a percentage of the claim equal to the amount insured ($400,000) divided by the amount that should have been insured (90% of $500,000 = $450,000).

• Using the coinsurance formula:
  • Amount insured: $400,000
  • Amount that should have been insured: $450,000
  • Amount of loss: $100,000
  • Payment calculation:
    • $400,000 / $450,000 = 89%
    • 89% x $100,000 loss = $89,000 payment

So in this example, even though the loss was $100,000, the policyholder would only receive $89,000 due to the coinsurance penalty. The remaining $11,000 is the portion the policyholder agreed to self-insure.

The Purpose and Benefits of 90% Coinsurance

Insurance companies include 90% coinsurance clauses for several key reasons:

• Encourages adequate insurance – It motivates policyholders to insure their property to close to full value. This prevents people from buying less coverage just to save money on premiums.

• Reduces risk – With proper coverage amounts, the insurer’s risk of loss is lower. Their payouts on claims will more likely align with the premiums collected.

• Maintains rate stability – Premiums can remain more affordable since the risk is distributed properly between insurer and policyholder.

• Prevents inflated claims – Knowing they’ll take a penalty, policyholders are less likely to inflate the value of their claims.

• Fair premiums – The insurer can charge premiums that accurately reflect the risk if property values are properly reported.

For the policyholder, the main benefit of 90% coinsurance is keeping premium costs down. Because it provides financial motivation for people to buy adequate coverage, insurers don’t have to pad premiums to account for underinsured properties.

What Happens if You Don’t Meet the 90% Requirement?

If at the time of a loss your coverage does not meet the 90% coinsurance requirement, the claim payment will be reduced based on the coinsurance formula:

• Amount of insurance carried / Amount of insurance required X Loss amount = Payment amount

Using the earlier example, the homeowner who only carried $400,000 coverage on a $500,000 home would see a reduced payment of $89,000 on their $100,000 claim.

Failing to meet the 90% requirement essentially makes you a co-insurer, meaning you retain some of the risk rather than transferring it all to the insurance company. This retained risk is the gap between your coverage maximum and the 90% of replacement value that you should have insured.

The coinsurance penalty serves as an incentive for policyholders to properly insure their property. It protects the insurer from large losses when properties are significantly undervalued and underinsured.

Coinsurance Requirements: 80% vs. 90% vs. 100%

While 90% is a common coinsurance percentage, insurers may require 80%, 100%, or other values. The higher the specified percentage, the more coverage the policyholder must buy to avoid a coinsurance penalty.

• 80% coinsurance – Most lenient option requiring the least amount of coverage. Property must be insured to at least 80% of replacement value.

• 90% coinsurance – Intermediate option providing incentive to insure to near full value. Property must be insured to at least 90% of replacement value.

• 100% coinsurance – Strictest requirement mandating property is fully insured. The entire replacement value must be insured to avoid penalty.

Insurers will choose a coinsurance percentage based on their risk appetite and target policyholders. A higher percentage ensures property owners carry adequate coverage. Lower percentages allow more flexibility.

Pros and Cons of 90% Coinsurance for Policyholders

Pros

• Lower premiums – 90% coinsurance allows insurers to keep premium rates more affordable.

• Motivation for proper coverage – Reduces chances of being underinsured and hit with a big coinsurance penalty.

• Shared risk – Policyholder still retains a small portion of the risk.

Cons

• Insuring to value required – Must properly estimate property value to meet 90% threshold.

• Penalties for underinsuring – Even being slightly below 90% will trigger a coinsurance penalty.

• Co-insurance – Policyholder agrees to retain some risk in the event of loss.

Whether 90% coinsurance is good or bad depends on the policyholder’s priorities. It provides financial incentive to carry adequate coverage, but also penalizes those who don’t meet the requirement.

Example Claims With and Without Meeting 90% Coinsurance

Here are two examples of how a claim payment would differ if the 90% coinsurance requirement is or isn’t met:

Example 1

• Replacement value: $800,000
• 90% of replacement value: $720,000
• Amount insured: $700,000
• Claim amount: $150,000

Since the amount insured ($700,000) is less than the required 90% of value ($720,000), the coinsurance formula applies:

• $700,000 / $720,000 = 97%
• 97% x $150,000 loss = $145,500

Payment = $145,500

Example 2

• Replacement value: $800,000
• 90% of replacement value: $720,000
• Amount insured: $750,000
• Claim amount: $150,000

Because the amount insured ($750,000) exceeds the required 90% of value ($720,000), the full claim amount is paid.

Payment = $150,000

Insurers will clearly indicate coinsurance requirements on policy documents. Policyholders should review this information and ensure they carry adequate coverage.

Frequently Asked Questions

What is the difference between coinsurance and a deductible?

A deductible is the amount the policyholder must pay out-of-pocket on a claim before insurance kicks in. Coinsurance is the percentage of the loss the policyholder agrees to cover if they underinsure the property. The coinsurance payment is in addition to the deductible.

Can you avoid the 90% coinsurance penalty?

Yes, by insuring the property to at least 90% of its replacement value, the coinsurance clause will not apply. Some insurers may also allow an endorsement to remove or reduce the coinsurance requirement, for an additional premium.

What happens if you insure for more than 90% of value?

There is no penalty for overinsuring beyond the 90% threshold. The claim payment will simply equal the amount of loss up to the policy limit. But insuring for too much will lead to higher premiums.

Does coinsurance apply to liability claims?

No, coinsurance percentages and penalties apply only to first-party property damage claims, not third-party liability claims. Your coverage maximum for liability claims will be paid regardless of coinsurance.

Can coinsurance requirements be negotiated?

In some cases, yes. An insurer may be willing to lower the coinsurance percentage for a policyholder with robust risk management practices or favorable loss history. But terms are not negotiable for most standard policies.

The Bottom Line

Understanding coinsurance is crucial for property owners, as failing to meet requirements can drastically reduce claim payments after a loss. A 90% coinsurance clause provides strong motivation for carrying adequate coverage while also allowing some flexibility. Take time to understand the coinsurance details in your policy.