By: Dan Galos, CWCA, AFIS, SBCS, Sales Executive / Risk Advisory Solutions Show A fire breaks out and burns part of the building where your business operates. You file a claim, and the adjuster comes out to assess the damage. A lot of time passes while you wait for a check, but when it finally arrives, the payment only covers a fraction of the cost done.“This isn’t fair! How can they do this to us?”Well, did you read the contract you signed? When you purchase an insurance policy, you agree with the insurance carrier where they will pay for covered causes of loss as long as the loss meets the requirements of the many provisions within the policy. One of those provisions frequently overlooked is coinsurance. You may be familiar with coinsurance from its use in the healthcare industry (i.e., you go to the doctor and have to pay 20% of the bill). Coinsurance in commercial policies doesn’t work the same way. In commercial insurance, the coinsurance clause states that you, the insured party, are insuring your property to the appropriate limit of coverage. The insurance carrier wants you to insure your property to full value. If a covered cause of loss occurs and your property is not covered to full value, you become the co-insurer of the risk and have to pay for a portion of the loss. What does this look like in real life?There will be a small amount of math here, so sharpen your #2 pencils and dust off your 6th-grade mathematics books. For the sake of simple math, say you purchased an insurance policy to cover a building you own with a limit of $600,000 and a $5,000 deductible. One day there is a small fire that causes $100,000 of damage. The insurance carrier looks and sees you have an 80% Coinsurance clause on your policy. Meaning, your building must be insured to at least 80% of its true value to have the full amount of the claim paid. The insurance adjuster finds that the true value of your building is currently $1,000,000, not $600,000, like you stated in your insurance application. Herein lies the problem. Your insurance policy stated that you must have at least 80% of the building’s value in coverage limits. 80% of $1,000,000 is $800,000, meaning you are short of having the proper coverage. The insurance carrier will now impose the coinsurance “penalty,” avoiding payment for the portion of the loss for which you did not properly insure the building. The formula looks like this: ((Coverage you have/Coverage you should have had) x Loss) – Deductible = Payment  To save you from digging out the old Texas Instruments calculator: [(100,000 x (600,000/800,000)] – 5,000 = $70,000 In this scenario, because you did not insure the full value of the building, you ended up paying a portion of the loss. The insurance carrier only pays $70,000 of the loss, and you’re on the hook for the remaining $30,000. Coinsurance clauses can be at 80%, 90%, or 100%. The lower the coinsurance, the better; ideally, you will have it removed from the policy. Many times, it can be as simple as having your insurance broker request to have the policy written on an Agreed Value basis. This eliminates the coinsurance provision, removing the risk of having to pay for a part of the loss yourself as long as the building or property is insured to full value. Typically, this change can be made for little to no cost to you as the building owner. Many brokers overlook this point and leave their clients with a significant gap in coverage. Correctly insuring your building and property is pivotal to establishing a foundational risk management program. A relatively simple fix can protect your business from a significant amount of repair bills and headaches. Are you curious to know more? Call your Horton representative today to learn more about your policy provisions. Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your needs. What is co-insurance? Co-insurance is an ignored idea regarding acquiring and upholding health insurance. You will find many people who are not insured enough. It is possible that just one or two medium losses on their existing policy could create an enormous financial adversity. Before we continue it is important to note that insurance laws differ from state to state, so don’t take one’s law for granted. Exact wording and use of grammar may be different between states. This article will simply try to explain what co-insurance is and the main concept behind it. You are also encouraged to verify your existing policies. A Simple Definition of Co-insurance: The majority of property and health policies stand on a 80/20 co-insurance clause. This clause ascertains with the contract that the insurance company will have to pay 80 percent of the incidentals beyond the deductible, whereas the insured will have to pay 20 percent up to some limit. This limit is called a stop-loss. For an easier understanding about what co-insurance is let us look at an example: You have an accident with the total hospitalization costs of $20,000. Your existing healthy policy contains an 80/20 co-insurance clause, deductible of $1000 and a stop-loss limit of $4,000. In the above example, how much is insurance company liable to pay and how much are you responsible for? First of all, your contract contains a deductible. Due to your policy, you are accountable to pay the amount of your deductible, say $1,000. Following, you have to pay 20% of the remaining $19,000, which is $3,800. So your final costs of the entire hospital bill would be $4,800. If you need more information please contact us at (816) 322 6350 or visit our website. What is the purpose of coinsurance provisions?Coinsurance Provision — (1) A property insurance provision that penalizes the insured's loss recovery if the limit of insurance purchased by the insured is not equal to or greater than a specified percentage (commonly 80 percent) of the value of the insured property.
What is the purpose of deductibles and coinsurance?A deductible is the amount you pay for coverage services before your health plan kicks in. After you meet your deductible, you pay a percentage of health care expenses known as coinsurance. It's like when friends in a carpool cover a portion of the gas, and you, the driver, also pay a portion.
What is the benefit of co insurance?One of the primary advantages is that it helps keep premiums down since you share your medical care cost with the insurance company. Coinsurance also gives you an incentive to be more careful about your health since you are responsible for a portion of your medical.
What is the purpose of coinsurance and deductibles quizlet?This deductible means that all losses that occur during a specified time period, usually a policy year, are accumulated to satisfy the deductible amount. Once the deductible is met, the insurer pays losses in excess of the deductible. The fundamental purpose of coinsurance is to achieve equity in rating.
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What is the purpose of coinsurance provisions in health insurance
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