Coinsurance/Insurance to Value Revisited



Using the formula, the figures are:

*$9,000 Less $500 Deductible

It is important to note that based on the language of the loss settlement provision in the homeowners policy, the deductible is subtracted from the loss before the coinsurance percentage is applied.

Had the deductible not been subtracted until after the coinsurance percentage was applied, the amount payable would have been slightly less, as follows:

85.9% x $9,000 = $7,731 minus $500 deductible = $7,231 rather than $7,302; $71 less.

In both instances, the actual cash value of $8,000 is the larger figure, so that amount, minus the $500 deductible, is the amount payable for this loss.

Next, let’s look at an example in which the larger amount is the insurance to value proportion, or fraction.

Assume the same replacement value of $400,000, the same limit of insurance at $275,000 and the same $500 deductible. While the full cost to replace the roof without deduction for depreciation is still $9,000, assume the actual cash value of the roof (after depreciation) is only $6,000. (In this case we are dealing with an older roof, which has more depreciation.)

To calculate the proportion, the figures are:

$275,000 x $8,500* = $7,302 $320,000 *$9,000 Less $500 Deductible

The figure computed from using the formula exceeds the actual cash value loss of $6,000, so the insurer will pay the larger figure. (Keep in mind that if the insured met the 80 percent replacement cost requirement and insured for $320,000, the full replacement cost of $9,000 — less the applicable deductible — would have been paid.)

“$275,000 (insurance carried) $320,000 (insurance required) Yields 85.9% x $8,500* = $7,302 By obtaining proper coinsurance and insurance to value, insureds can reduce the risk of underinsurance.”