The Swails have an 80 percent co-insurance policy on their $100,000 home. Explain what this means. If they have an 80 percent co-insurance clause, a policy for $80,000, and suffer a covered loss of $40,000, how much will the insurer pay? If they have an 80 percent co-insurance clause, a $60,000 policy, and suffer a loss of 25% of their property, how much will the insurer pay?

Answer 1

Co-insurance is a common arrangement in property insurance whereby the risk is shared between insurer and insured. If the co-insurance percentage is 80 percent, the value of the Swails home is $100,000, and their policy is for $80,000, the Swails will be fully protected against loss not to exceed the $80,000. In the first instance, then, the Swails will recover $40,000. In the second instance, the policy amount is less than 80 percent of the property value, so the Swails will only receive a proportion of their loss. Their recovery is figured by taking the face value of their policy (or $60,000 ) divided by the fair market value of the property times the co-insurance percentage (or $100,000 times 80% or $80,000 ) times the loss of $25,000. In the second instance the Swails would recover three-fourths of $25,000 or $18,750.