How Coinsurance Clauses Work in Homeowners Insurance

If your homeowners policy has a coinsurance clause, insuring your home for less than a set share of its rebuild value can shrink your claim check even before a deductible applies. The most common threshold insurers use is 80%. Here's how that math actually works, using a simple example of a $200,000 home insured for only $150,000.

What a coinsurance clause actually requires

A coinsurance clause is a condition included in some property policies requiring that, if the policy contains one, the property is insured to a level that satisfies it, though not every homeowners policy is written with one. The National Association of Insurance Commissioners' glossary identifies 80% as the percentage most commonly written into these clauses, though it notes the exact figure is set by the individual policy and can differ. The Insurance Information Institute puts the responsibility squarely on the homeowner: if your policy contains a coinsurance clause, you need to make sure your property is insured to a level that satisfies it. This is different from the everyday meaning of coinsurance in health insurance, where the term usually refers to a percentage of each claim you pay above your deductible, such as a 20% health insurance coinsurance clause where you'd pay the deductible plus 20% of covered losses.

What the coinsurance requirement means for your payout

A homeowners coinsurance clause ties your claim payout to how your coverage compares to the amount your policy requires you to carry, which is why the Insurance Information Institute advises making sure your property is insured to a level that satisfies the clause your policy contains. The NAIC glossary identifies 80% as the coinsurance percentage most commonly specified in property insurance coinsurance clauses, though the exact figure is set by the individual policy.

Worked example: $200,000 home insured for $150,000

Assume a home worth $200,000 to rebuild, insured for only $150,000, under a policy with the 80% coinsurance requirement the NAIC glossary identifies as typical, and a partial covered loss of $50,000. To satisfy the clause, the homeowner needed to carry at least $160,000 of insurance, which is 80% of the home's $200,000 value. Instead, the home was insured for $150,000, or 75% of its value, below the 80% coinsurance requirement. That leaves the policy $10,000 short of the $160,000 needed to meet the coinsurance threshold. Because the homeowner carried $150,000 of the $160,000 required, the insurer would pay only 93.75% of any covered loss under the standard coinsurance formula, up to the policy's limits. On the assumed $50,000 covered loss, that formula produces a payment of about $46,875, before any deductible is subtracted. The remaining roughly $3,125 of that $50,000 loss falls to the homeowner, separate from and in addition to whatever deductible applies.

• insured amount: 150000
• required amount: 160000
• loss amount: 50000
• Formula: (insured amount / required amount) * loss amount
• Result: 46875

On a $50,000 covered loss, the coinsurance formula pays out about $46,875 before any deductible and subject to policy limits, instead of the full amount, because the home was insured for only 93.75% of the required $160,000 coverage level.

• insured amount: 150000
• required amount: 160000
• loss amount: 50000
• Formula: (insured amount / required amount) * loss amount
• Result: 46875

Coinsurance payout before deductible on a $50,000 loss when a $200,000 home is insured for $150,000 against an 80% requirement.

1. Find your home's current rebuild (replacement) value so you can compare it to the coverage limit your policy requires.
2. Check your policy's declarations page for the coinsurance percentage listed, since the exact figure is set by the individual policy and can vary from the commonly used 80%.
3. Multiply the rebuild value by that percentage to find the minimum coverage amount your policy requires you to carry.
4. Compare that minimum to your actual coverage limit; if your limit is lower, you're underinsured relative to the clause and a partial claim could be reduced the way the worked example above shows.
5. If you're short, contact your insurer to raise your coverage limit to at least the required amount, and ask them to confirm the clause's exact percentage and how it's calculated for your policy.

Key takeaways

• The most commonly used coinsurance percentage in property policies is 80%, but the exact figure is set by your specific policy.
• If your policy has a coinsurance clause, you're responsible for making sure your coverage limit satisfies it.
• In the worked example, insuring a $200,000 home for $150,000 (75% of value) against an 80% requirement left the homeowner's insurer paying only 93.75% of a covered loss.
• On a $50,000 loss in that example, the shortfall cost the homeowner about $3,125, on top of any deductible.
• This homeowners coinsurance clause works differently from the coinsurance percentage many people know from health insurance, which is a share of each claim above the deductible rather than a coverage-adequacy test.

Homeowners coinsurance versus health insurance coinsurance

	Homeowners property coinsurance clause	Typical health insurance coinsurance
What it measures	Whether your property is sufficiently insured to comply with the clause your policy sets	A fixed percentage of each covered claim you pay above your deductible
Common figure	The NAIC glossary describes 80% as the usual minimum for homeowners policies, but the exact figure is set by the individual policy	20% is used as III's example figure for health coinsurance
What happens if you don't meet it	The insurer pays only a proportional share of a covered loss, capped by policy limits and applied on top of the deductible, as shown in the worked example above	You pay the stated percentage of each covered claim above the deductible

Two ways coinsurance shows up in insurance, and what each means for what you pay.

Does every homeowners policy have an 80% coinsurance clause?

The NAIC glossary describes 80% as the coinsurance percentage most commonly specified in property policies, but it also notes this is a usual minimum and that the actual percentage is set by the individual policy, so you need to check your own declarations page rather than assume 80% applies.

Is the coinsurance penalty the same as my deductible?

No. In the worked example, the coinsurance formula reduced the payout on a $50,000 loss to about $46,875, leaving the homeowner short about $3,125. In this example, that $3,125 shortfall applies on top of any deductible, not instead of it.

How is the coinsurance requirement calculated in dollars?

In the worked example, an 80% requirement on a $200,000 home meant the homeowner needed to carry at least $160,000 of coverage to fully satisfy the clause.

Is homeowners coinsurance the same thing as health insurance coinsurance?

No, and the terminology overlap causes confusion. The Insurance Information Institute describes typical coinsurance, using a health insurance example, as a percentage of each claim above the deductible that the insured pays, such as a 20% coinsurance clause meaning you pay the deductible plus 20% of covered losses. A homeowners property coinsurance clause instead tests whether your coverage limit meets a required share of your home's value, and the Insurance Information Institute advises making sure your property is sufficiently insured to comply with that clause.

What should I do if I think I'm underinsured relative to my clause?

Start by checking your policy's coinsurance percentage and comparing it against your home's current rebuild value, since the Insurance Information Institute advises making sure your property is sufficiently insured to comply with the clause. If your coverage limit falls short of the required amount, contact your insurer to raise it before you need to file a claim; in the worked example, a $10,000 shortfall against the $160,000 required amount meant the insurer would pay only 93.75% of a covered loss.

If your policy contains a coinsurance clause, make sure your property is insured to a level that satisfies it: check your declarations page for the exact percentage it specifies, since not every homeowners policy includes this clause and the individual policy can set the figure higher than the 80% the NAIC glossary describes as the usual minimum. If your coverage limit falls short, as in the worked example where $150,000 of coverage fell $10,000 short of the $160,000 an 80% clause required on a $200,000 home, the insurer's payout on a claim is reduced under the coinsurance formula.

Sources

• www.iii.org
• content.naic.org
• www.iii.org