Not everyone is an insurance expert, but there are a handful of terms and phrases in the insurance business that you really ought to know. We've been sharing some of these terms here on our blog.
This week, we’ll continue the trend by discussing something called coinsurance.
Coinsurance – You’ve heard the word, perhaps even read it when your property policy accidentally fell open. But what is it? Most property insurance policies contain a coinsurance clause, and take a couple of pages in your policy to explain it.
Here’s the gist: At its most basic, coinsurance is a mathematic equation. No, it doesn’t involve two trains leaving from different cities at different speeds; it’s much simpler than that.
Essentially, as long as you agree to insure your property at the appropriate level (usually) within a certain percentage of the property’s full replacement cost, then the company agrees to pay in full, any covered partial loss. Fail to insure to the proper percentage, and the company is entitled to reduce your claim payment by the same percentage that you underinsured. Here’s what the equation looks like:
|
Amount of insurance carried
|
X
|
Loss
|
-
|
Deductible
|
=
|
Payment
|
|
Amount of insurance you should have carried
|
Let’s look at this in real numbers:
|
100,000 (or to make it easy) 1
|
X
|
10,000
|
-
|
1,000
|
=
|
$4,000
|
|
200,000 (or to make it easy) 2
|
One half of $10,000 is $5,000 minus a $1,000 deductible = far less than you hoped to receive. Coinsurance is an extremely important concept to keep in mind when considering property insurance. While it may cost a little more to insure your property properly, the consequence of not doing so could cost you much more.
It’s not rocket science; just insurance.
Give us a call with your insurance questions at 607-535-6501 or pay us a visit at our office in Montour Falls, NY.
Check back in next week for the final installment of 4 Insurance Terms That You Should Know.