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Coinsurance is a penalty imposed on the insured by the insurance carrier for under reporting/declaring/insuring the value of tangible property or business income. The penalty is based on a percentage stated within the policy and the amount under reported.

Coinsurance provisions found in property policies exist primarily to assure that the insurance carrier receives adequate premium for the risk insured. Without a coinsurance condition, and its applicable penalties, insureds might purchase an amount of coverage somewhat less than the value of the property because of the statistically low probability of a total loss. The purchase of lower limits lowers the collectable premium which ultimately necessitates higher rates.

Did/Should x Loss – Deductible = Payment

The most commonly issued coinsurance percentage would be 80% but it can be as high as 100%, which would impose the greatest penalty for underreporting. For this reason, it is vital for values of property to be accurately reported and updated annually to reflect inflation and other increases in cost.