How to Understand The Co-Insurance Clause On Your Homeowners Policy

So you bought your first house and insured it, your policy covers you for $500,000.00 with 80% co-insurance. WHAT DOES THAT MEAN?

Instructions

Difficulty: Moderate

Things You’ll Need:

• A CALCULATOR

1. The Co-Insurance Clause
   
   The co-insurance clause states that the insured must carry insurance coverage equal to a given percentage of the actual cash value of the insured property at the time of loss. If the insured fails to carry the proper amount, he/she becomes a co-insurer to the percentage of his/her deficiency.
   
   The co-insurance requirement is used so that there may be a proper basis for setting the coverage rates. All property policies covering fire insurance have this requirement.
   
   NOTE: 80% co-insurance means you must be insured up to 80% of the actual cash valus AT THE TIME OF LOSS. NYS law is 80% or more
2. The Formula
   
   C/R x L=S –
   Coverage Carried ÷ Required Coverage(%) x Loss = Settlement
3. Example:
   
   Your house has a value of $10,000. (OK, for all you smart asses out there, so you can't really purchase a house for $10,000. let's pretend you can) You purchase a homeowners policy with $8,000. of coverage, and your policy has an 80% co-insurance clause, with a $100 deductible. How much will you collect on a loss of $4,000?
4. Lets do the math:
   
   
   8000 Coverage ÷ 8000 Required = 1 x 4000 Loss = 4000 Settlement - the 100 Deductible = The Amount you'd receive is 3900
   In this example, you are insured to value.
5. But what if you only bought a $6,000. policy? 6,000 Coverage ÷ 8,000 Required = .75 x 4,000 Loss = 3,000 Settlement - the 100 Deductible = The Amount you'd receive is 2,900
   In this example,you are UNDERINSURED!
6. What if you bought a $12,000.00 policy?
   6,000 Coverage ÷ 12,000 Required = 1.50 x 4,000 Loss = 6,000 Settlement - the 100 Deductible = The Amount you'd receive is NOT 5,900 Your loss is only $4,000. and that's all you're getting! You are OVERINSURED!