Building Your Business Business Insurance What Is Coinsurance? Definition & Examples of Coinsurance By Marianne Bonner Marianne Bonner Facebook Twitter Marianne Bonner, a certified CPCU and ARM, has covered small business insurance topics for The Balance since 2013. She worked in the insurance industry for 30 years as an analyst and underwriter among other roles and holds multiple professional designations. Along with The Balance, Marianne has written many articles for International Risk Management Institute's Risk Report. learn about our editorial policies Updated on July 19, 2020 Share Tweet Pin Email Photo: kate_sept2004 / Getty Images Coinsurance is cost-sharing between an insurance company and a policy owner. Exactly how it works depends on the type of policy being purchased. Learn more about coinsurance options. What Is Coinsurance? Many commercial property policies contain a coinsurance clause. This clause imposes a penalty when a policyholder suffers a loss and has failed to purchase an adequate insurance amount. In property insurance, coinsurance is based on the concept of insurance to value, meaning the ratio of your insurance limit to the value of your insured property. This means that you must purchase a policy limit that meets or exceeds the coinsurance percentage. If you have an 80% coinsurance clause and a building that would cost $1 million to replace, you must purchase at least $800,000 in coverage. Coinsurance is also used in medical and dental insurance. Many health and dental policies cover medical or dental costs according to a specified ratio such as 80/20 or 70/30. The larger number (80% or 70%) represents the percentage paid by the insurer for a covered service while the smaller number (20% or 30%) is the percentage the insured person must pay. Coinsurance clauses can also be found in some directors and officers and errors and omissions policies. These clauses may require you to pay a portion of any damages awarded or settlements. Note With health and dental policies, a higher coinsurance percentage for the insured means lower premiums. How Coinsurance Works Coinsurance clauses work by imposing a penalty on policyholders who fail to purchase enough insurance to satisfy the coinsurance percentage shown in their policy. The coinsurance clause has no effect unless there's a property loss. If a loss occurs, the insurer will compare the insurance limit on your policy to the amount of insurance you were required to purchase based on the coinsurance percentage. If you purchased less than required, the insurance company might reduce your claim payment in proportion to the difference. If you purchased 10% less than required, the insurance company might pay 10% less. Coinsurance clauses encourage businesses to buy adequate insurance. If coinsurance clauses didn't exist, some policyholders would try to save money on premiums by insuring their property for only a portion of its value. These policyholders would have insufficient insurance to cover large losses. For example, suppose that you own a small office building. After consulting a building contractor, you estimate the replacement cost of your building to be $2 million. You buy a property insurance policy with a 90% coinsurance clause. You insure the building for $1.8 million, which is 90% of the building's replacement costs. Coinsurance clauses encourage policyholders to insure their property at or near its full value. When most policyholders buy full limits of insurance, insurers collect more premium dollars and can charge lower rates overall. This helps ensure property rates are equitable. In a commercial property policy, the coinsurance clause is typically found in the policy conditions section. The fact that your policy contains such a clause doesn't mean that your policy is subject to coinsurance. Coinsurance applies only if a coinsurance percentage is shown in the policy declarations. Alternatives to Coinsurance One way to avoid a coinsurance clause is to purchase agreed value coverage. For this coverage option to apply, you must submit a statement of values to your insurer before the policy begins (or renews). The statement summarizes the value of your insured property, and the values may be expressed in terms of replacement cost or actual cash value, whichever you've selected. Agreed value coverage applies for the term of the policy. To continue the coverage to the following policy period, you must submit a new statement of values before your current policy expires. Another option for avoiding the coinsurance clause is value reporting. This option is typically used by businesses with property values that fluctuate due to changes in inventory. An example is a ski shop situated in an area popular for winter sports. You can choose quarterly, semi-annual, or monthly reporting and then submit reports of your property values at the required intervals. Key Takeaways Coinsurance is cost-sharing between an insurance company and the policy owner. In property insurance, it means buying a policy that covers a specified percentage of the replacement value. In health and dental insurance, coinsurance is the percentage of costs you cover out-of-pocket. If you fail to purchase the coverage required by your coinsurance clause and there’s a loss, your insurance company may reduce your claim payment. You can avoid a coinsurance clause by purchasing agreed value coverage or by using value reporting. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Travelers. "Calculating Coinsurance." Accessed July 19, 2020.