How does Property Damage Coinsurance Work?

Coinsurance is a clause in home insurance policies to prevent people from under-insuring their home in order to save money on premiums. Basically, coinsurance determines the actual value of your house, then, determines the percentage of that value you have declared on your policy. If there is a difference in these two numbers, only a portion of your claims may be covered.

How to Calculate Coinsurance

You can calculate your coinsurance requirements by starting with two important numbers: the value of your home owner's policy and the value of your home. The value of your home can be found through an inspection done every few years. This value is also what you declare on your taxes each year. Once you have the two numbers, perform the following calculation:

  • Value of insurance / Value of home = percentage of coinsurance 

  • Or: $150,000 of insurance / $200,000 home = 75% coinsurance

In the referenced example, 75% of any claim you file can be covered by your insurance company. Because you are not insuring the full value of your home, you are also not insuring the full value of any part of your home. This means you must be prepared to accept only a partial insurance payment on any single claim.

Why you Need Coinsurance

Coinsurance is required by most insurance companies and state regulating bodies to protect home owners. Insurance is a way people split the cost of unforeseen damages. The earliest form of insurance started when cities were first established. When there were large fires, the entire community had to pitch in to pay fire companies to come and put out the flames. These fire companies were the very first insurance companies. In this way, society at large divides up the cost of repairing each other’s unforeseen damages. Today, entire communities don't share an insurance company; instead, policy holders choose which group to align with when they sign a contract with a specific insurance company. Because you are splitting up the risk equally among policy holders, it would not be fair for one person to pay a lower amount than others and receive the same full benefits. Coinsurance is the only way to make sure each policy holder is treated fairly when it is time to pay out a claim. 

How to Avoid Coinsurance

The only way to avoid coinsurance is to purchase an insurance policy for the entire value of your home. Unfortunately, this is not usually a practical measure. Typically, you will save money by accepting a lower payout on most of your claims and getting a smaller coinsurance payment. It is difficult for people to think of things this way because they often think of insurance payouts as "free money." While you may get more back than you give to an insurance company in one year, it is more common to lose money over the life of the policy. Keeping your premiums low and paying for as much as you can, out of pocket, will save you money over time. The savings will be present even if you have a few large home repair bills along the way.

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