Coinsurance: Avoiding Penalties and Ensuring Adequate Home Coverage

How do I know if I'm carrying too much or too little coverage?

Determining the appropriate amount of coverage for your home is crucial. Understanding the replacement cost value of your property is essential for insurance agents to provide excellent coverage for their clients. Ensuring the replacement cost is adequate prevents clients from facing a coinsurance penalty at the time of loss.

What is coinsurance?

Coinsurance is a penalty that an insurance company imposes on the insured for underinsuring the value of their home. Typically, most insurance companies require you to carry at least 80% of the replacement cost of the home at the time of loss. The penalty is based on company policy language, which is a percentage of what the home should have been valued at the time of loss and the amount for which it was underinsured.

Let me give you an example of one of my clients back when I ran an agency. When I did a quote for this individual, their home coverage was listed at $150,000. However, when I evaluated their home, the replacement cost calculated was $460,000. This means that this client had been underinsured for the last five years. Fortunately, nothing happened to the home. If something had occurred and caused damages due to a covered loss, they would have been hit with a coinsurance penalty.

Coinsurance requires that a client maintain at least 80% of the replacement cost at the time of the loss. In this example, they needed $368,000 of coverage on their home for a claim to be paid out fully. Here's a formula you can use to calculate how much you would be paid out on a claim if you were hit with a coinsurance penalty:

- The amount of insurance needed at the time of loss (80% of $460,000) is $368,000.

- They only had $150,000 worth of coverage.

- Divide $150,000 by $368,000, giving us 0.407.

Now, suppose a disaster happened, like a fire in the kitchen, resulting in a $100,000 loss. Even though you might think the insurance company should pay the full $100,000 since the client had $150,000 in coverage, that’s not how it works. The insurance company will apply the penalty for underinsuring below the 80% threshold. The calculation is 0.407 times the loss, meaning the insurance company will only pay out $40,760.87 on the $100,000 loss. The coinsurance penalty in this example is almost $60,000.

- They had $100,000 worth of damages.

- Times 0.407 by $100,000, giving us $40,760.87

This is a significant penalty for not having the proper value of your home insured. As an insurance agent, it is vitally important to review the home values of your clients every year. The replacement cost of a home can vary drastically from one year to another, and you don’t want to go several years without reviewing this.

If you want more tips and tricks to help you spot gaps in your clients' coverage, comment the word "insurance," and we will connect for a top performance call to show you ways we can better help you serve your clients by providing the best policies for them.