Chapter 1 · Insurance
Property coinsurance
Insure to value, or share the loss
Follow one building worth $400,000, with an 80% coinsurance clause and a $1,000 deductible.
Most property losses are partial, so an owner might be tempted to insure for less than the building is worth. The coinsurance clause makes that owner share in every loss.
1.1 · The coinsurance penalty
Did ÷ should × loss − deductible
The policy requires insurance of at least the coinsurance percentage times the property's value at the time of loss. If the owner carries less, the insurer pays only the fraction carried ÷ required of the loss, less the deductible.
payment = (carried ÷ required) × loss − deductible
Why: Premiums are priced assuming insurance to value; the penalty keeps underinsured owners from paying less for the same partial-loss protection.
Required: 80% × $400,000 = $320,000. Carried: $240,000, a ratio of 0.75.
On a $100,000 loss: 0.75 × $100,000 − $1,000 = $74,000.
Watch out: The requirement uses the value at the time of the loss, not when the policy was bought; values that rise can trigger a penalty.
1.2 · Meeting the requirement, and the limit
No penalty, but never more than the limit
Carrying at least the required amount means the loss is paid in full, less the deductible. Either way, the insurer never pays more than the policy limit.
payment ≤ limit carried
Why: The limit is the most the insurer agreed to pay.
Carrying $320,000, the same $100,000 loss pays $99,000.
With only $240,000 carried and a total loss of $400,000, the formula gives $299,000, but the insurer pays $240,000: the limit.
Watch out: The penalty matters for partial losses. On a total loss an underinsured owner is already capped at the limit.
1.3 · Two policies: pro rata
Each pays its share of the total coverage
When two policies with pro rata other-insurance clauses cover the same loss, each pays in proportion to its limit's share of the total insurance.
share = this policy's limit ÷ total limits × loss
Why: It stops an insured from collecting twice for one loss.
Policies of $200,000 and $100,000: $300,000 in all. On a $60,000 loss, the first pays $40,000 and the second $20,000.
Watch out: Pro rata is not equal shares: the larger policy pays more.
Practice · Set 1
Each question sets the figure to its own numbers
A building is worth $500,000 and its policy has an 80% coinsurance clause. How much insurance is required?
Practice · Set 2
Each question sets the figure to its own numbers
A building worth $200,000 is insured for $150,000 under a 90% coinsurance clause with a $1,000 deductible. A $40,000 loss occurs. What does the insurer pay, to the nearest dollar?
- Paid by the insurer
- Short / borne by the insured