Wading through unwieldy insurance policy text may be a great cure for insomnia. But if you’ve given up after a few dense pages of your homeowners policy, you may have missed a very important requirement that could trigger a painful surprise when you make a claim.
The co-insurance clause
The co-insurance clause requires the structure of your home to be insured for the amount it would take to rebuild it at the time you purchase your policy, and for at least 80% of the cost at the time of the claim. If you don’t, and then make a claim, your claim payment will be reduced based on the percentage that your house is underinsured.
- Example: House with a replacement cost value of $350,000
- Coinsurance percent required at the time of the claim: 80%
- Minimum amount of insurance coverage required: $280,000
- Actual amount of coverage on the policy: $210,000
- Claim: $75,000 for damage from a house fire
The co-insurance penalty would be applied as follows:
The actual amount of the insurance ($210,000) is divided by the required amount of the insurance ($280,000). The resulting amount (.75) is multiplied by the amount of the loss ($75,000) to determine the amount for which the claim would be paid ($56,250). In this case, the homeowner would have $18,750 in loss that would not be covered by the policy.
See if you are at risk
- What to check: your house or condo policy’s Declarations Page
- Where to find how much the structure of your home is insured for: the section that indicates the “Coverage A” amount
What to think about:
- Any remodeling or additions you may have made to your home without adjusting your policy’s Coverage A amount.
- The last time you updated your policy’s Coverage A amount. The cost of materials and labor increases every year – older policies can have a substantial gap between the current Coverage A value and the actual replacement cost value.
- Whether an inflation guard provision is on your policy. It automatically adjusts your Coverage A amount based on the consumer price index. If so, check to see if the current coverage amount is realistic.
What to do now
Call us to work with an Electric Insurance Risk Coach to help ensure you have the coverage you need. Our Risk Coaches are licensed insurance professionals who are glad to help you navigate the often-perplexing world of insurance coverage. Call us at 800.227.2757, Monday through Friday, from 8:00 a.m. to 8:00 p.m. ET.
