Co-Insurance

The coinsurance clause is a provision commonly found in farm property insurance policies designed to encourage you to adequately insure your property to its full value. This clause applies when the insured property is underinsured relative to its chosen valuation method of either Replacement Cost or Actual Cash Value.

The purpose of the coinsurance clause is to encourage you to accurately assess the value of your property and purchase adequate insurance coverage. This helps ensure that in the event of a loss, the insurance payout is sufficient to cover the cost of rebuilding, repairing, or replacing the damaged property.

Here’s how the coinsurance clause typically works:

Stated Coinsurance Percentage: The insurance policy specifies a coinsurance percentage, often 80% or 90%. This percentage represents the minimum amount of the property’s value that you must insure property at to avoid penalties.

Insured Amount: You insure the property at either Replacement Cost (RC) or Actual Cash Value (ACV) when purchasing the insurance policy. This declared value should meet or exceed the coinsurance percentage specified in the policy.

Calculation at the Time of Loss: In the event of a claim, if the insured amount is less than the required percentage of the property’s value (as determined by the coinsurance clause), you may be subject to a coinsurance penalty.

Coinsurance Penalty: The coinsurance penalty is applied if the insured amount is less than the required percentage of the property’s value. The penalty reduces the amount of the claim payment by a factor that reflects the degree of underinsurance.

Example: Let’s say the coinsurance clause specifies an 80% coinsurance requirement (the most common). If you insure your property for only 60% of its RC or ACV, you are underinsured by 20%. In this case, the insurance company would apply a coinsurance penalty to any claims. If the property sustains $100,000 in damage, the policyholder will only receive a portion of the claim payment, reflecting the underinsurance penalty.