One of the most common clauses in any insurance policy is co-insurance.

Who thought it up in the first place? Co-insurance goes back over 100 years, and is meant as a means to persuade people to buy insurance to the full value of their risk being insured. Let’s take property insurance as an example. Underwriters develop rates which are applied to the amount of insurance you need, to come up with the premium they will charge. A lot of people will appreciate that insurance companies collect premiums from many policy holders, to pay the losses of a few policy holders. But we all know that only a small percentage of the losses are total losses. So, if it is far more likely that you will have a partial loss, why not buy insurance for an amount less than your total property? When an underwriter considers that policyholders might only purchase ‘partial insurance’, they realise that they will not get enough total premium to pay for the losses that do happen. So they would have to charge a higher rate and this could become a slippery slope, as policyholders consider purchasing even lower limits. Or… underwriters could put a clause into their policy, so they will not pay all of a loss when the policyholder has not insured to the full value of their property.  They would essentially make the policyholder a ‘co-insurer’.

If you do not have the amount of insurance you should have, the amount you will actually collect from your policy can be estimated with a formula like:

Amount of Insurance I DID buy / Amount of Insurance I SHOULD have bought

X

The Amount of Loss/Claim

=

Amount you Collect.

There are different co-insurance percentages in different policies; such as a requirement that you must insure to 80% of the actual replacement value or 90%. And, there may also be some alternatives to this straight forward co-insurance requirement. You should discuss this with your insurance broker. Click here to contact us.