Did you know coinisurance applies to homeowner’s insurance?

I’m currently enrolled in the Executive Certificate for Financial Planning class at the University of Portland.  The class is a 10-month intensive study geared towards preparing students to sit for the CFP® exam.

We just got done studying insurance and I must say thus far this has been my weakest subject.  As a consumer, like many other financial services, I knew very little about insurance policies and what I should look out for.  Fortunately for me I have a trusted adviser in Jeremy Duncan @ Country Companies (email me if you’d like to be put in touch with him) so for the most part I’m happy with my families coverages.

To give you an example of the details that one should familiarize themselves with when shopping for homeowner’s insurance.  Did you know that homeowner’s insurance policies have coinsurance?  That’s right, I emailed Jeremy to have him explain it to me and here is his response:

Coinsurance clauses are placed in policies to help protect insureds against unexpectedly rising construction costs (when we’re talking about dwellings), and to limit insurers from overpaying for claims when a client is under-insured.  How it works is kind of complex at first blush, but pretty simple once you have it.  For example, you have a policy with a 80% coinsurance clause for your dwelling.  I run a building valuation and determine that it would cost $100,000 to replace.  That means that as long as the client is insuring the dwelling above 80% (or $80,000 in our example), we would replace the building in full up to the $100,000 policy limit.  Therefore, with a coinsurance clause of 80%, the client is not required to carry the full replacement value to receive the full replacement cost.

However, if the client is not insuring to the coinsurance level and there is a loss, there would be a “coinsurance penalty”.  Here’s how the penalty is calculated:  You take the amount of insurance that the client did carry and divide it by the amount that they should have carried, and the result is the percentage of the loss that the insurer will pay.  So with our $100,000 example, if the client insured to $75,000, they are insured to 75%, below the coinsurance clause, so we would only pay 75% of the loss.

I’d recommend contacting your insurance adviser to make sure you’re all covered….