The Co-Insurance Clause and What It Means for Your Home’s Coverage

You’ve got a partner in your Frontline agent, an ally to consistently help you maintain the appropriate level of insurance coverage for your home, which means insuring your home for its full replacement value. The cost to replace your home is not equivalent to its real estate value; what your home may sell for in today’s real estate market is likely lower than what it would cost to rebuild or repair it after disaster strikes.

What would happen if a home was insured only to its real estate value or only for what’s left on the mortgage? With partial coverage comes a partial claim payment – because homeowners without full coverage have decided that rather than transferring risk to the insurance company, they will retain some of it. That makes them financially responsible for paying a portion of the loss.
Purchasing coverage for less than the full replacement value of your home means a policyholder has decided to “co-insure” their property. While that saves some money in annual premiums, it could be very costly if a home gets hit by severe weather or a fire. There’s a penalty for cutting corners, with a co-insurance provision in an insurance policy as motivation to carry a reasonable amount of insurance.

Co-insurance penalty explained

In property insurance, co-insurance is a provision that, in effect, apportions some of the expense for a loss to those who purchase less than full coverage. Without co-insurance, some people may be tempted to play the odds and limit the amount of insurance they buy. This places an unfair burden on those who wisely chose to fully insure. So, a co-insurance provision limits what an insurer pays for damages, making the claims payout reflect the proportion insured for at the time the loss occurred.

Here’s an example of how an 80 percent co-insurance penalty would work:

Let’s say the rebuilding estimate for a home is $500,000, and yet the homeowners purchased only $300,000 worth of coverage, which is only 60 percent of rebuilding costs. Hurricane winds came and caused $200,000 in damage to this underinsured home. Since the home was not insured for at least 80 percent of rebuilding costs, the co-insurance penalty would apply. The claims payment math would be calculated like this:

Amount of Coverage Purchased X Amount of the Loss = Claim Payment (Minus Deductible)
Amount that SHOULD be Purchased
$300,000 (Coverage Purchased) ÷ $500,000 (Full Coverage Amount) x $200,000 (Amount of Loss) = $120,000 (Less the Deductible)

The homeowners in this scenario would have out-of-pocket costs that someone who is fully insured would not.

Insurers use a replacement cost calculator to effectively match up coverage with what is needed to make a damaged home good as new. And, the calculation is only as accurate as what goes into it. That is why it is important to work closely with your agent to arrive at a replacement cost amount that brings the confidence of full protection. Absent such a careful review, you may be an unwilling co-insurer. Always inform your insurance agent of special features in your home – because you’ll want to retain them if anything damages them.

Be sure to consider:

  • Upgrades made to your home, such as new cabinets or stone countertops.
  • Replacement of carpeting with hardwood or tile, such as marble or other high-end materials.
  • Remodeling of bathrooms or room additions.
  • Additions of outdoor kitchens and related appliances.

And, it’s also wise to consider an inflation guard endorsement. This is an endorsement to your homeowners insurance policy that automatically adjusts the limits of replacement costs, providing further assurance that you’ll have all the protection you need – no matter what happens.

Please remember that the comments contained in this blog are general in nature and that coverage under any specific policy of insurance will depend upon the terms and conditions of such policy.