How to Calculate Homeowner’s Coinsurance Penalty

Homeowners seeking insurance have the option to insure their homes to full value or realize a premium savings if they utilize a coinsurance clause. It is common practice in the insurance industry to insure buildings to 80 or 90% of its value. Doing so saves the homeowner money. Insurance company statistics show that most homeowner insurance claims are submitted for much less than 100% of the building value. The one caveat is that homeowners must ensure they carry enough insurance to meet the policy’s coinsurance requirement or suffer a penalty at the time of a loss.

Difficulty: Moderate

Instructions

1. Review your policy’s coinsurance clause. Some policyholders are not aware of their coinsurance requirement until they suffer a loss. At that time it’s too late to make sure you’re carrying adequate limits.

2. Calculate your coinsurance amount. Take the replacement cost value of your home and multiply it by the coinsurance requirement. The resulting figure is the minimum limit you should carry on your homeowners’ insurance policy. If you carry more, contact your insurance agent to see if you get a rate discount for carrying more than the required amount. If you carry less than is required by the coinsurance clause, you need to call your insurance agent and increase your limit. For example, if you own a $350,000 house and your policy contains 80% coinsurance requirement, you must insure your home for $280,000 (It’s a lot cheaper purchasing an insurance policy with a limit of $280,000 than it is one with a limit of $350,000).

3. Find out the amount of the loss. In order to determine the coinsurance penalty (if any) at the time of a claim, you need to know the amount of the loss. If you put in a claim for fire damage or some other covered loss, you will need to contact your claims adjuster to get the final figure for the loss.

4. Calculate the penalty using the coinsurance formula. The formula for calculating the coinsurance penalty is the amount of insurance carried divided by (the amount of insurance required multiplied by the amount of the loss. For example, the coinsurance penalty for a $350,000 house with an 80% coinsurance clause that is a insured for only $260,000 and suffers a $25,000 loss is calculated as follows:
   
   ($260,000/$350,000) x $25,000 = $18,571
   
   For the mathematically challenged $260,000/$350,000 is the same as .74. In other words, the policyholder would only receive 74% reimbursement of the loss because the house was underinsured.

Tips & Warnings

• If the real estate market is fluctuating widely its best to periodically review the insurance policy and compare it to the house value.
• If you live in an area that is prone to severe weather and 100% losses are possible, it's best to insure your home to full value.

Resources

• Homeowner Coinsurance Clause

[gahazeleyes]

on 6/15/2009 Thanks for sharing.