Business Glossary

sharing of an insurance risk, common when claims could be of such size that it would not be prudent for one company to underwrite the whole risk. Typically, the underwriter is liable up to a stated limit, and the coinsurer's liability is for amounts above that limit.

Policies on hazards such as fire or water damage often require coverage of at least a specified coinsurance percentage of the replacement cost. Such clauses induce the owners of property to carry full coverage or close to it.

insurance plan in which the insurer provides indemnity for only a certain percentage of the insured's loss, reflecting the relative division of risk between insurer and insured. A coinsurance clause of 80%, for example, requires the property owner to keep property insured to at least that percentage of the property value. If the insured fails to keep that much insurance, he will not be reimbursed for the full loss.

in property insurance , when the insurance policy contains this clause, coinsurance defines the amount of each loss that the company pays according to the following relationship:

Amount of Insurance Carried Amount of Insurance Required

×

Amount of Loss

=

Insurance Company Payment

Where:

Amount of Insurance Required

=

Value of Property Insured

×

Coinsurance Clause Percentage Amount of Insurance Required

Example:
Value of building = $100,000
Coinsurance Clause Percentage Amount of Insurance Required = 80%
Amount of Fire Damage to the Building = $60,000
Amount of Insurance Carried = $75,000
The insurance company would be required to pay $56,250 of the $60,000 loss:

$75,000 $100,000 × 80%

×

$60,000

=

$56,250

Note that the indemnification of the insured for a property loss can never exceed (1) the dollar amount of the actual loss; (2) the dollar limits of the insurance policy; (3) the dollar amount determined by the coinsurance relationship. The lesser of the above three amounts will always apply.

In commercial health insurance, when the insured and the insurer share in a specific ratio of the covered medical expenses, coinsurance is the insured's share of covered losses. For example, in some policies the insurer pays 75-80% of the covered medical expenses and the insured pays the remainder. In other policies, after the insured pays a deductible amount, the insurer pays 75-80% of the covered medical expenses above the deductible and the insured pays the remainder until a maximum dollar amount is reached (for example, $5000). The insurer pays 100% of covered medical expenses over this dollar amount up to the limits of the policy.

clause in an insurance policy stating the minimum percentage of value to be insured in order to collect the full amount of loss.

Example: Abel has a building worth $1,000,000. He figures that the maximum loss in the event of a disastrous fire will be $600,000, and insures it to $600,000. The policy has an 80% coinsurance clause. Since he did not insure it to 80% of its value, he will not receive the full amount of loss. The ratio he will receive is:

amount carried amount should carry	=	$600,000 $800,000	×	loss	=	maximum recovery, subject to maximum carried
(property value × coinsurance rate)