Coinsurance clauses in property insurance can reduce payouts for partial-loss claims when the amount insured is below the percentage required by the policy. This has nothing to do with coinsurance clauses in health insurance. Not all home insurance policies in Canada include coinsurance clauses.
Using resources including the Chambre de l’assurance de dommages fact sheet on coinsurance, the Office québécois de la langue française definition, the federal home insurance guide, and the Canadian Condominium Institute’s appraisal discussion, our team of editors dug into what coinsurance is, where to find the clause and how it can affect your home insurance claim payment.
What Is the Coinsurance Clause in Home Insurance?
In the context of home insurance, coinsurance is a clause that requires homeowners to insure their property for a minimum total percentage of its total replacement cost. This is typically noted in percentages, usually 80%, 90% or 100%. If the home is underinsured when a homeowner files a claim, the insurance company will issue a penalty, resulting in a reduced payout. This clause discourages underinsurance and ensures that homeowners carry sufficient coverage to rebuild their property in the event of a loss.
Unlike co-pays in health insurance, which require a fixed out-of-pocket amount per visit, home insurance coinsurance checks whether a policyholder is adequately insured when a claim is filed. The penalty comes into effect only if the policyholder is underinsured, leaving the homeowner to pay for a percentage of the damages themselves.
For example, say that your home’s total replacement cost is $500,000 and your policy requires at least 80% coverage. You must insure your home for at least $400,000 to get the maximum claim value. If you choose to insure it for only $300,000, you may face a coinsurance penalty when filing a claim.
What Is the Coinsurance Formula?
In this example, the building replacement cost is $500,000, the policy requires 80%, and the amount carried is $300,000. The required amount is $400,000.
The general coinsurance formula for partial losses is:
Amount of insurance carried ÷ amount of insurance required × covered loss = claim payment
The payment remains subject to the policy limit, deductible and other terms.
If a covered partial loss is $200,000, the proportional amount is:
($300,000 ÷ $400,000) × $200,000 = $150,000 before the deductible
If the applicable deductible is $1,000 and the wording applies it after the proportional calculation, the sample payment becomes $149,000. The owner’s gap is $51,000.
Review the coinsurance formula in your policy. We have presented a sample here, but the policy terms dictate how coinsurance is calculated. Confirm the order in the contract rather than treating this illustration as universal claim wording.
Read More: Read the Guide to Dwelling Coverage
Partial and Total Losses Are Treated Differently
| Loss | Coinsurance issue | Other limit on recovery |
|---|---|---|
| Partial loss, requirement met | Generally, the proportional penalty does not apply. | Payment still depends on coverage, settlement basis, deductible and policy limit. |
| Partial loss, requirement not met | The insurer may reduce the loss in proportion to the shortfall. | The deductible and policy conditions still apply. |
| Total loss | Do not reuse the partial-loss formula without reading the contract. | The amount insured can cap payment and may be below the cost to rebuild. |
When Can You Face a Coinsurance Penalty?
- Failure to increase the insured value or statement of values to keep pace with construction costs
- Construction of additions or major renovations, such as finishing a basement or converting a garage to living space, that may increase rebuilding costs
- Not reporting changes to the use, occupancy, size, construction quality or special features of the building
- Carrying less than the required amount of insurance on a scheduled item or location, even though the aggregate limit may be adequate
Why Underinsuring Your Home Is Risky
The risk is not limited to a house burning down. A coinsurance shortfall can reduce payment for a smaller covered fire, water or wind loss even when the repair cost is below the stated policy limit. The owner may have to fund the penalty, deductible and any uncovered work.
A mortgage requirement does not prove the rebuild limit is adequate. The lender protects its financial interest, while the owner still needs to compare the policy value with current reconstruction characteristics and contract conditions.
Read More: Learn How Home Value Relates to Home Insurance Cost
Can Coinsurance Clauses Be Removed or Waived?
Some policies may use an agreed-value, stated-amount or replacement-cost arrangement that changes or waives a proportional penalty when its conditions are met. Names and effects vary. An endorsement does not remove unrelated exclusions, deductibles, special limits or duties after a loss.
Guaranteed or enhanced replacement cost is also policy-specific. It may allow payment above the stated building limit after a covered loss, but only within the contract and after required valuation, notification and rebuilding conditions are satisfied.
A Renewal Check That Prevents Surprises
- Read the declarations and search for “coinsurance,” “co-insurance,” “proportional” and “replacement cost.”
- Confirm the building size, construction, roof, finished areas, detached structures and major renovations.
- Ask which value and date the insurer would use to test the clause after a loss.
- Request the calculation in writing, including the required percentage, estimated value and amount carried.
- For an unusual, multi-unit or commercial property, ask whether a replacement-cost appraisal and updated statement of values are needed.