Does Co Insurance Apply to a Total Loss?

Co insurance is a common clause in many property insurance policies that requires the policyholder to carry a certain amount of insurance coverage relative to the total value of their property. If the insured does not maintain adequate limits, they may be penalized through co insurance in the event of a claim. This article explores how co insurance works in property policies and whether it still applies in the event of a total loss.

What is Co Insurance?

Co insurance in property insurance is a provision that requires the policyholder to insure their property up to a specified percentage of its replacement cost value. This percentage is called the co insurance percentage.

Common co insurance percentages are 80%, 90%, or 100%. For example, with an 80% co insurance clause, if a home is worth $500,000 the insured must carry at least $400,000 in dwelling coverage.

If the insured maintains adequate limits to meet the co insurance percentage, there is no penalty. However, if they carry coverage below this threshold, the co insurance clause gets triggered. It will reduce any claim payout proportional to how much they fell short.

The co insurance provision encourages policyholders to properly insure their entire property value. In return they receive lower premiums. It aims to prevent underinsurance.

How Does the Co Insurance Penalty Work?

Here is an example to show how the co insurance penalty calculation works:

• Home value: $500,000
• Co insurance percentage: 80%
• Co insurance requirement: $500,000 x 80% = $400,000
• Actual coverage carried: $300,000
• Loss amount: $100,000

Co insurance penalty calculation:

• Co insurance requirement: $400,000
• Actual limits carried: $300,000
• Co insurance percentage: $300,000 / $400,000 = 75%
• Loss amount: $100,000
• Co insurance reduction: $100,000 x (1 – 75%) = $25,000
• Payment: $100,000 – $25,000 = $75,000

Because the home was underinsured relative to the co insurance requirement, the claim payout is reduced. The insured ends up self-insuring for 25% of losses in this example.

Does Co Insurance Apply to a Total Loss?

In the event of a total loss where the entire home is destroyed, the co insurance penalty may still apply. The exact impact depends on the specific policy language. There are a few possibilities:

1. Full co insurance penalty applied

If the home is underinsured relative to the specified co insurance percentage, the same pro-rata penalty may still be assessed on a total loss.

In the above example, for a $500,000 total loss the insured would still only receive $375,000 after the 25% co insurance reduction.

2. Loss payment capped at actual limits

Alternatively, some policies state that for a total loss, the co insurance clause does not apply. However, the loss payment is still limited to the amount of insurance actually carried.

So in the example, they would simply receive the $300,000 policy limit. No co insurance penalty but still underpaid.

3. Agreed value loss settlement

Some policies may include an agreed or guaranteed replacement cost endorsement. This waives the co insurance penalty even for large underinsurance gaps, paying the full limit.

So in this case the insured would receive the full $300,000 policy limit with no reduction.

4. Co insurance waived

Finally, some insurers may choose to waive the co insurance penalty for a total loss even if it normally applies. But this would be on a discretionary basis. The policy language would still allow applying the penalty.

Waiver of Co Insurance for Total Losses

Many property insurance policies contain a waiver of co insurance clause. This clause specifies that co insurance is waived or does not apply in the event of a total loss.

But for partial losses, where only part of the home is damaged, the co insurance penalty still applies if the insured is under their required limit based on the specified co insurance percentage.

Having this waiver is beneficial for insureds. If their home is completely destroyed, they will not be subject to a reduced claim payment due to underinsurance. The waiver overrides the co insurance provision in place.

However, most policies with a waiver still impose some coverage limit based on the actual insurance carried. So even with the waiver, being significantly underinsured for a total loss will result in reduced compensation.

Co Insurance on Contents and Other Structures

In addition to applying co insurance to the primary dwelling coverage, policies may also impose co insurance requirements for contents and other structures like garages.

For example, a 90% co insurance clause could require that personal property be insured to 90% of its replacement cost.

If contents are not insured to this level, a co insurance penalty would apply to any contents claims in the event of a loss. The same concepts as above apply.

And like dwelling coverage, many policies waive contents co insurance penalties in the event of a total loss of personal property.

Avoiding Co Insurance Penalties

To avoid any unpleasant co insurance surprises, there are a few key steps policyholders can take:

• Know your co insurance percentages for dwelling, contents, and other structures. This is specified in the policy declarations or conditions.

• Determine the proper coverage limit to meet the co insurance requirement based on current replacement cost values.

• Discuss replacement cost for all property with your agent often – at least annually.

• Request a replacement cost estimate from the insurer every 2-3 years and adjust limits accordingly.

• Consider guaranteed replacement cost or agreed value endorsements to waive co insurance, even for large underinsurance gaps.

• Ask your agent to review limits and co insurance compliance when you remodel or make significant property upgrades.

Maintaining adequate coverage relative to the co insurance percentages is essential to avoiding claim headaches after a major loss. Reviewing this annually and securing policy endorsements as needed helps policyholders stay penalty-free.

Frequently Asked Questions

What happens if a house is not insured to its replacement value?

If a house is underinsured relative to its full replacement cost at the time of a loss, the co insurance penalty would apply to reduce any insurance claim payout. The more underinsured, the greater the penalty.

Does co insurance apply to additional living expenses?

Most policies do not apply co insurance penalties to additional living expense coverage after a loss. ALE coverage is based on the actual expenses incurred rather than home value.

Can co insurance be waived?

Yes, co insurance can be waived by securing endorsements like an agreed value provision or guaranteed replacement cost. Some policies may automatically waive co insurance for total losses.

What if home upgrades increased the value?

Upgrades and renovations can increase home value and replacement cost. Review coverage and co insurance compliance whenever making significant improvements.

What is the minimum co insurance percentage?
Generally the lowest co insurance requirement is 80%. Some insurers may impose minimums as high as 100%. Review your exact co insurance percentages.

The Bottom Line

Co insurance is an important clause in property insurance policies that requires the policyholder to insure their home to a specified percentage of its replacement cost value. If they fail to do so, claims will be reduced by the resulting co insurance penalty.

For a total loss, most policies still apply this penalty or otherwise limit payment based on the actual limits carried. Having replacements cost endorsements in place is important to avoid large gaps in coverage after a catastrophic loss.