Co-Insurance Explained

Co-insurance is a policy provision where the insurer provides indemnity for only a certain percentage of the loss, reflecting the relative division of risk between insurer and insured. A co-insurance clause of 80%, for example, requires the property owner to keep their property insured to at least that percentage of the property value. If the insured fails to keep that the require amount of insurance, they will not be reimbursed for the full loss.

Co-insurance in property insurance is where the insurance policy contains this clause, co-insurance defines the amount of each loss that the company pays according to the following relationship:

Note that the indemnification of the insured for a property loss

Where:
Amount of Insurance Required = Value of Property Insured × Co-insurance Clause Percentage Amount of Insurance Required

Example:

Value of building = $100,000
Co-insurance Clause Percentage Amount of Insurance Required (Minimum to avoid penalty) = 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 (less any deductible).

Calculation:

$100,000 × 80% = $80,000 (Minimum Required)

$75,000 amount of coverage on building divided by amount required $80,000 = .9375 or 93.75%.

Amount of loss $60,000 X .9375 = $56,250 (Amount paid by Insurer less any deductible.

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 Health Insurance, when the insured and the insurer share in a specific ratio of the covered medical expenses, co-insurance 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.