Coinsurance explained: How it works, examples, and tips for homeowners

The coinsurance formula is a key part of homeowners insurance. It helps calculate how much a homeowner will get reimbursed after a claim. This formula is important when homeowners do not maintain insurance coverage of at least 80% of their home’s replacement value. If they don’t meet this requirement, they will receive only a partial reimbursement for their claim, which can lead to significant out-of-pocket expenses.

Coinsurance is a common clause in property insurance policies. It ensures that policyholders have adequate coverage and that insurance companies receive fair premiums for the risks they take. If a homeowner has a mortgage, lenders typically require a minimum coverage amount.
Coinsurance is usually expressed as a percentage. Most policies require homeowners to insure their properties for 80%, 90%, or even 100% of their actual value. For example, a property valued at $1,000,000 with a coinsurance requirement of 80% must be insured for at least $800,000. If it is underinsured, the homeowner may have to share the loss with the insurance company.

The coinsurance formula is simple:

Coinsurance Formula
=
(
Actual Coverage
Required Coverage
)
×
Loss
Coinsurance Formula=(
Required Coverage
Actual Coverage
​
)×Loss
If homeowners have less coverage than required, they become “co-insurers,” meaning they share the risk and loss.

– **Building Value:** $1,000,000 – **Coinsurance Requirement:** 80% – **Required Amount of Insurance:** $800,000 – **Actual Amount of Insurance:** $600,000 – **Amount of Loss:** $300,000
Using the formula:

(
600
,
000
800
,
000
)
×
300
,
000
=
225
,
000
(
800,000
600,000
​
)×300,000=225,000
In this case, the insurer pays $225,000 for the claim. The homeowner is underinsured and must cover the remaining $75,000.

– **Building Value:** $1,000,000 – **Coinsurance Requirement:** 80% – **Required Amount of Insurance:** $800,000 – **Actual Amount of Insurance:** $800,000 – **Amount of Loss:** $300,000
With the same formula:

(
800
,
000
800
,
000
)
×
300
,
000
=
300
,
000
(
800,000
800,000
​
)×300,000=300,000
Here, the insurer pays the full $300,000 since the homeowner met the required coverage.

It’s crucial for homeowners to keep their insurance coverage in line with their property value. If the property’s value increases, such as from $1,000,000 to $1,250,000, the existing coverage of $800,000 will only represent 64% of the value, falling below the 80% requirement.
Additionally, homeowners should be aware of any deductibles in their policies, as these will reduce the insurance payout. Coinsurance clauses also exist in business interruption policies, ensuring that revenue streams are adequately insured.

This means that homeowners must have insurance coverage of at least 80% of their property’s replacement value. If they do not, they may not receive full compensation for losses.

To calculate coinsurance, divide the current insurance coverage by the required insurance amount, then multiply by the loss or repair cost.

Homeowners should consult their mortgage lenders and insurance policies. Most require at least 80% of the property’s replacement value, but some may require 90% or 100%.

Yes, homeowners should regularly review and adjust their coverage as property values change or improvements are made.

If you have a deductible, the amount will reduce your claim payment. For example, if your claim is $300,000 and your deductible is $5,000, you will receive $295,000.

Coinsurance typically applies to property and business interruption insurance policies. It may not apply to health or auto insurance.

To avoid penalties, ensure that your insurance coverage meets or exceeds the required percentage of your property’s value.

If you’re unsure, consult your insurance agent or a financial advisor to review your policy and coverage requirements.