In business, coinsurance is defined as the provision in your commercial property insurance policy that requires you to insure your property to a certain percentage of its value.
(Coinsurance can also mean when more than one insurance company jointly covers a person or business, but most of the time, it’s the above.)
When you hear “coinsurance,” your first thought is probably health insurance. In health insurance, coinsurance is the percent of the final bill you have to pay after paying your deductible. So if you have 20% coinsurance, you are responsible for paying 20% of the costs after paying your deductible.
While they share the same name, coinsurance in business isn’t a percentage of costs you have to pay. Rather, it’s a clause in your property insurance policy that states what percentage of your property’s value you need coverage for.
A coinsurance clause in a commercial property policy ensures you carry enough coverage to protect your possessions.
Say your office building is valued at $1,000,000. If your policy has a clause with a coinsurance percentage of 80%, that means you should insure the building for at least $800,000.
But, maybe to save money, you only get $600,000 worth of coverage. The danger of doing this is when you file a claim. Your insurer can penalize you by not paying out the full amount of your damages, even if they’re under your policy limits.
For example, let’s say a fire causes $50,000 worth of property damage, and you make a claim. Your property insurance policy has a limit of $600,000 and a $1,000 deductible, so it looks like you have plenty of coverage for this incident, right?
However, according to the coinsurance clause, you were supposed to have at least $800,000 in coverage. Because you failed to meet your coinsurance percentage of 80%, you will face a penalty.
Penalties vary but are often determined by a simple ratio: the amount you carried divided by the required amount. Here’s the math:
$50,000 in damage – $1,000 deductible = $49,000 payout pre-penalty
$600,000 coverage carried / $800,000 coverage required = 0.75.
0.75 x $49,000 = $36,750 final payout
Because your property insurance didn’t meet the 80% coinsurance clause, you’ll have to pay $12,250 out-of-pocket for damages. Ugh.
It may feel like a coinsurance clause is just a sneaky way for insurance companies to not have to pay the full amount of damages when something happens. But the fact is, while it may get missed in the small print, it’s just an insurer’s way to ensure you are carrying adequate coverage. When something goes wrong, you’ll want to have the protection.
Basically, coinsurance is a type of cost-sharing in insurance, in which the cost of an insurance claim is split between more than one party. That is, usually you and the insurance provider.
Plus, buying adequate coverage benefits you in the long term. The main benefit of insurance is that you transfer your risk to an insurance company in exchange for paying a premium. If you’re paying less than what’s required in the coinsurance clause, you’re essentially retaining the risk and will wind up paying more if something happens.
Every small business insurance policy has clauses and limits that you must be aware of when purchasing coverage. Before you sign on the dotted line, it’s crucial that you understand your coinsurance percentage. Your business gets the coverage it needs, and you get the peace of mind that comes with knowing you’re protected no matter what happens.
At NEXT, we know small business owners don’t like surprises when it comes to insurance payouts. That’s why we make understanding the ins and outs of insurance as simple as possible.
We make purchasing it simple too.
You can start a quote, customize your options and access your certificate of insurance online immediately — in about 10 minutes.
Business insurance is divided into different policies. We offer seven types so it's easy to design the coverage that fits your business.