Log in Newsletter

Take Cover: Protect Property with the Right Insurance | By Mark W. Rice

In a world that becomes increasingly more complicated each day, we often find ourselves baffled by the many decisions that come our way, small and large.

How do I program the DVR? And I better off with a Roth IRA?

One of the most confusing is insurance coverage, specifically property insurance. Many people continue to struggle with the term “coinsurance.” It may sound intimidating, but the ramifications could be devastating if your policy is not structured properly.

Coinsurance refers to the joint assumption of risk between the insurer and the insured. The best way to understand the impact on your home or business is to simplify the issue. In case of a catastrophe – a fire, for example – most insurance policies promise to return your property to the same condition before the loss. This feature is referred to as “replacement cost” coverage. As the homeowner or property owner, you agree to a certain insurance-to-value ratio, usually 80, 90 or 100 percent. However, if you undervalued the price of your home or business, you become a “co-insurer” with your insurance company after that fire.

Here’s a practical example: Let’s say your home is valued at $250,000, and your insurance policy has an 80 percent coinsurance feature, but you have only insured the house for $100,000. If the fire caused $40,000 worth of damage, the insurance company will only pay $19,500, according to this formula: HAVE ÷ SHOULD x LOSS = the amount that the company will pay minus your deductible.

The purpose of coinsurance is not to punish you for carrying inadequate insurance-to-value, but rather to provide a financial incentive that encourages you to carry adequate limits in the event of major losses and reward you (in many instances) with a significant premium reduction for carrying the proper amount of coverage. For example, if your home is valued at $250,000, carries a policy with an 80 percent insurance-to-value ratio and is insured for $200,000, that same fire will not leave you $20,000 short. The insurance company will instead pay $40,000, minus your deductible.

These steps also apply for your contents coverage. The financial incentive mentioned earlier is a reduction in premium when you increase the coinsurance level to 90 percent and even more when you move to 100 percent.

So, take a few moments to review your policies and make sure you have adequate values on your home or business. If you have questions, give your agent a call.

Mark W. Rice is a partner with Callahan & Rice Insurance Group in Fayetteville.