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Why is there the Co-Insurance Clause?


Part 2 of 2

Last time we were discussing “What Does Co-Insurance Mean”? We reviewed the calculation of co-insurance and how it applies to you at the time of a claim.

A quick review of the formula used:

           Amount of Insurance Carried x Loss = Payment

            Amount of Insurance that

              Should be Carried

What we did not discuss was why there is a co-insurance clause in the first place. Believe it or not, with the co-insurance clause included in your policy you actually receive a reduced rate.

The theory behind the co-insurance clause is that if you only insure for example to 50% of the property value and therefore only pay 50% of the premium on the said property; at the time of a claim you should then only expect to receive 50% of the money lost. Note: If you have a total loss you would be paid the full amount of the policy limit that you selected which would again be 50% of the money lost. So, the formula still works. The co-insurance clause makes sure that you receive your proportionate amount that you should receive. If this clause were not in the policy a certain percentage of people would only insure on a percentage basis thinking that they will only sustain a partial loss. It is true that the vast majority of claims are partial losses. Therefore, from the insurance companies perspective they can offer reduced rates for those policies that have the co-insurance clause included. So… look at your policy!

Be sure to seek advice and purchase insurance from those who understand your business!