How to use the coinsurance clause penalty calculator
- Enter the value of the property that the policy uses for coinsurance, such as replacement cost, and the coinsurance percentage from your policy.
- Enter the coverage limit you carry, the amount of the loss and the deductible.
- Read the estimated payment, the coverage the clause requires and the coinsurance penalty.
- Change the coverage carried to see how much more would have been paid with higher coverage.
Formula
required coverage = value x coinsurance percentage
ratio = coverage carried / required coverage, never more than 1
payment = loss x ratio - deductible, not below 0 and not above the limit carried
The penalty is the loss minus loss x ratio. The deductible is taken after the ratio is applied in this model. Policies differ on the order, so check your wording.
A building insured for less than the clause requires
A building is valued at $400,000 and the policy has an 80% coinsurance clause, so the clause requires $320,000 of coverage. The owner carries $240,000, so the ratio is 240,000 / 320,000 = 75%.
A $60,000 loss is reduced to $45,000 by the ratio, a penalty of $15,000. The $1,000 deductible leaves $44,000 as the estimated payment, and the owner pays the other $16,000. With $320,000 of coverage the ratio is 100% and the payment is $59,000.
Why insurers use a coinsurance clause
Most losses are partial, so a policyholder could pay a premium for a small amount of coverage and still collect in full on a small loss. A coinsurance clause asks the owner to insure at least a set share of the property's value. If coverage falls below that, the payment is scaled down in proportion, so people who carry less coverage share more of every loss.
What this page does not decide
The value used for the test, the percentage, the order of the deductible and any extra limits all come from the policy. Some policies use an agreed value that waives the clause. This is a general explanation of the arithmetic, not advice, and your policy wording and the insurer decide the real result. To compare deductibles, use the Deductible Comparison Calculator.
Assumptions and limits
- The coinsurance percentage is whatever you enter. 80 is an example you can change, not a standard.
- The ratio is applied to the loss first and the deductible is subtracted afterward. Your policy may order them differently.
- The payment cannot be more than the coverage limit carried.
- Other limits, sublimits, depreciation and exclusions are not modeled.
Frequently asked questions
What is the coinsurance penalty?
It is the part of the loss that the insurer does not pay because coverage was below the level the clause requires. It equals the loss minus the loss multiplied by the ratio.
Does the penalty apply to a total loss?
Yes, the ratio is applied to any loss, but the payment can never exceed the limit you carry. For a loss larger than the limit, the limit is the cap.
Which value should I enter for the property?
Use the value the policy names for the test, which is often replacement cost or actual cash value. Your policy or insurer can tell you which applies to your coverage.
Can I avoid the penalty?
The penalty does not apply when the coverage you carry is at least the required amount. Ask your insurer or agent about the right level before a loss.