Co-insurance requires policyholders to cover a percentage of covered losses, typically 20%, while their insurer pays the remaining 80%. This cost-sharing mechanism appears in health, property, and commercial policies.
When a claim occurs, the insurer pays its portion first, then the policyholder covers their share. For example, if your $10,000 claim has an 80/20 co-insurance split, the insurer pays $8,000 and you pay $2,000.
The policyholder's portion is calculated based on the policy's co-insurance requirement. Most common requirements are 80% or 90%, meaning you must insure at least 80% or 90% of the property's value to receive full coverage. Falling below this threshold results in penalties during claims.
My small business client had a $50,000 equipment claim with an 80/20 co-insurance split. Their policy required insuring at least 80% of equipment value ($80,000 minimum). Since they carried $100,000 coverage, they met the requirement. The insurer paid $40,000 and the client paid $10,000. Had they carried only $60,000 coverage (below the 80% threshold), their claim payment would have been reduced proportionally.
Co-insurance requirements appear in policy declarations. Review these carefully - underinsuring valuable assets can lead to significant out-of-pocket expenses during claims. Some policies offer options to adjust co-insurance percentages, usually with corresponding premium changes.
According to the Insurance Information Institute, proper co-insurance structuring helps maintain affordable premiums while ensuring adequate protection. The National Association of Insurance Commissioners recommends regularly reviewing co-insurance requirements as property values change.