What is a Co-Insurance Clause?

The “Co-Insurance clause”, typically associated with Marine policies, but also applicable to property Insurance policies can be defined as follows:
A clause in an Insurance policy that limits the amount payable (in the event of a claim) to a sum not in excess of the value of the property damaged or subject to the loss and that is in the same proportion to the loss as the policy is to the value of the insured property

To be put simply Co-Insurance essentially means that the policy-holder bears the responsibility of ensuring that the property to be insured is not insured for a value less than a pre-determined percentage value of the true replacement value of the property. If the policy-holder allows this to happen, then the Insurer (in the event of a claim) may choose to invoke the Co-Insurance clause.

Co-Insurance Example:

Mrs Jane Bloggs owns a house that, if totally destroyed in a fire, would cost $500,000 to rebuild. However, Mrs Bloggs, for reasons known only to her, chooses to insure the house for $200,000.

The house is partially destroyed in a fire with the repairs set to cost $100,000.

The house is insured with ABC Insurance Limited, whose House Insurance Policy specified that the Co-Insurance limit is not to fall below 80% of the replacement value of the house. As the replacement value is $500,000, then the Co-Insurance limit would be $400,000 ($500,000 x 80% = $400,000).

In order to comply with the terms of the Insurance contract between herself and ABC Insurance Limited, Mrs Bloggs needed to insure the house for at least $400,000.
However, Mrs Bloggs only has the house insured for $200,000 (the declared value), well below the Co-Insurance limit.

ABC Insurance Limited could now argue that, as the sum insured is well below the Co-Insurance limit, that Mrs Bloggs bears a sizeable proportion of the liability incurred as a result of the fire and as a result ABC Insurance Limited will not pay out the total amount of the loss ($100,000). In fact, ABC Insurance Limited will only pay out in accordance with their proportion of the liability incurred as a result of the fire and in accordance with the Co-Insurance clause contained in the policy.
This is calculated using a pre-determined Adjusted Loss formula.

The Adjusted Loss Formula:

Adjusted Loss = (Declared Value/Actual Value) x Loss Value
So in our example, Mrs Bloggs has insured for $200,000 but the replacement value at risk was actually $500,000 and the loss following the fire was $100,000. So, the claim would likely be adjusted as follows.

Adjusted Loss = ($200,000 / $500,000) x $100,000
Adjusted Loss = $40,000

It is estimated that up to 70% of property insured in the market may be subject to a Co-Insurance adjustment in the event of a claim.

For more information on Co-Insurance Clause or any Insurance policy questions please contact Nepean Brokers at 03 5982 2330.

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