What does 80 coinsurance mean on property insurance?

Coinsurance is a common clause in commercial and residential property insurance policies. It requires the policyholder to insure their property to a specified percentage of its replacement value. The most common coinsurance percentage is 80%. So what exactly does 80 coinsurance mean for your property insurance coverage?

What is coinsurance?

Coinsurance is a provision in property insurance policies that shares risk between the insurance company and the policyholder. Essentially, it requires you to carry insurance equal to a minimum percentage of the property’s value, usually 80%, 90%, or 100%.

If you meet the coinsurance requirement, the insurer will pay the full amount of a covered claim, up to the policy limits. But if you fail to insure to the specified level, you become a “co-insurer” and will only receive a partial settlement. The payment will be reduced proportionally based on how much insurance you did carry.

For example, say your home is worth $500,000. With an 80% coinsurance clause, you must insure it for at least 80% of that value, or $400,000. If you only carried $300,000 in coverage and suffered a $100,000 loss, you would only receive $75,000 from the insurer.

Why do insurers require coinsurance?

Insurers use coinsurance as an incentive for policyholders to adequately insure their properties. Without it, some may be tempted to purchase less coverage than they need to save on premiums. This could leave them severely underinsured in the event of a major loss.

Coinsurance protects the insurance company from big losses when properties are undervalued. It passes some of the risk back to policyholders who do not meet the minimum insurance requirement.

How does 80 coinsurance work?

An 80 coinsurance clause is the most common version found in property insurance policies today. Here’s an overview of what 80 coinsurance means:

• You must insure the property to at least 80% of its replacement cost value. This is the amount needed to completely rebuild or repair the property using new materials.

• To determine if you’ve met the requirement, multiply the property’s replacement value by 80% to get the minimum amount of insurance needed.

• If your dwelling coverage meets or exceeds that number, coinsurance will not apply and claims will be settled at replacement cost up to your limits.

• If your coverage falls short, your claim payments will be reduced by the same percentage you were underinsured.

• For example, if you only carried 60% of the required insurance, your claim would be reduced by 20%. So you’d have to pay 20% out of pocket.

Let’s look at some examples to see 80 coinsurance in action:

Example 1:

• Replacement value of home: $500,000
• 80% of replacement value: $500,000 x 0.80 = $400,000
• Dwelling coverage limit: $400,000
• Loss amount: $100,000
• Claim payment: $100,000

Since the dwelling limit meets the 80% requirement, the full $100,000 loss is covered.

Example 2:

• Replacement value: $500,000
• 80% of replacement value: $500,000 x 0.8 = $400,000
• Dwelling limit: $300,000
• Loss amount: $100,000
• $300,000 (amount insured) / $400,000 (amount required) = 75%
• Claim payment: $100,000 x 0.75 = $75,000

Here the homeowner is underinsured by 25% so their claim is reduced by 25%. They must pay $25,000 out of pocket.

How is replacement value calculated?

In order to know if you meet the 80% coinsurance requirement, you need to know your property’s replacement cost value. This is not the same as market value.

Replacement cost is the amount it would take to rebuild your home or repair damages using new materials of similar kind and quality, without deducting for depreciation. It factors in things like:

• Construction costs for your building type in your area
• Demolition and debris removal if needed
• Architect and planning fees if applicable
• Permits, utility hookup fees, etc.
• Costs to bring the rebuilt structure up to current building codes

Since replacement values can change over time, it’s important to periodically review your dwelling limit and request an updated replacement estimate from your insurer. Major renovations or additions to the home would also impact the replacement cost significantly.

Does coinsurance apply to contents?

Coinsurance generally applies only to coverage for the dwelling itself, not personal possessions or other contents. Contents coverage limits are usually based on actual cash value, which does account for depreciation.

However, some policies extend coinsurance requirements to certain categories of high-value contents like jewelry, furs, silverware, collectibles, or computers. The percentage requirement may be different as well. So check your policy to see if coinsurance applies to any of your contents.

How can you avoid or reduce coinsurance penalties?

Here are some tips to avoid reduced claim payments due to coinsurance:

• Insure to value. Know your home’s replacement cost and make sure your dwelling coverage meets or exceeds the 80% requirement. Ask your agent for an updated replacement cost estimate every 2-3 years.

• Review limits when renovating. If you remodel or add on to your home, the replacement value likely increases. Let your insurer know so they can recalculate the minimum amount of insurance needed.

• Consider a guaranteed replacement cost endorsement. This ensures the insurer will pay the full cost to repair or rebuild your home, even if it exceeds your dwelling limit due to rising construction costs. It adds an extra layer of protection so you don’t have to worry about coinsurance penalties.

• Insure contents adequately. Make a detailed home inventory to arrive at a sufficient limit for your personal belongings. If coinsurance applies to certain categories, purchase enough coverage to meet those requirements too.

• Ask about waiver options. Some insurers may offer an endorsement to delete or amend the coinsurance clause from your policy, for an additional premium.

• Purchase excess/blanket limits. Having this buffer above your dwelling and contents limits means you’re very unlikely to be caught short by the coinsurance requirement.

Pros and cons of coinsurance clauses

Like any insurance clause, coinsurance has some advantages and disadvantages for both policyholders and insurers:

Pros

• Encourages adequate insurance coverage
• Limits risk for insurance companies
• Helps keep premiums lower

Cons

• Can result in reduced claim payments if requirements are not met
• Makes the claim settlement process more complex
• Requires homeowners to know the replacement value of their property

While coinsurance can sometimes complicate the claims process, it exists for good reason. It motivates policyholders to properly value their property and transfer enough risk to their insurer. This prevents severe underinsurance, which benefits everyone in the long run.

Is the coinsurance requirement negotiable?

The coinsurance percentage written into your policy is generally not negotiable. Most insurers use 80% across the board. But you do have options if you have trouble meeting such a high requirement:

• Ask about waiving coinsurance. As mentioned, some insurers will delete or amend the coinsurance provision from your policy in exchange for a higher premium.

• Get quotes with a lower requirement. While 80% coinsurance is industry standard, some insurers may offer 90%, 100%, or no coinsurance options. Shop around to see what’s available.

• Inquire about flex coverage. This option from PCI Insurance allows you to insure as low as 70% of replacement value without penalty. They provide extended claim payments up to 150% of your limits.

• See if remodeling changes the percentage. Doing major renovations or additions that significantly increase value may allow you to get a lower coinsurance percentage from your insurer.

• Purchase excess limits. Carrying additional extended or blanket coverage limits reduces the risk of not meeting coinsurance requirements at the time of loss.

While the 80% figure itself rarely changes, you still have ways to work around or avoid coinsurance if needed. Talk to your insurance agent to come up with the best solution for your situation.

How are coinsurance and deductibles related?

Coinsurance and deductibles are two separate provisions that impact the amount you pay out of pocket on an insurance claim:

• The deductible is the fixed dollar amount you pay upfront on a claim before coverage kicks in. It applies regardless of coinsurance.

• Coinsurance only comes into play if you fail to meet the 80% requirement. It reduces the covered portion by a percentage based on your underinsurance.

For example, say you have a $500 deductible and your dwelling coverage doesn’t meet the 80% coinsurance requirement. You suffer a $10,000 loss. Here’s how it would work:

1. You pay the $500 deductible first.
2. The remaining $9,500 is subject to a reduced coinsurance payment, say 50%.
3. The insurer pays $4,750