Most insurance companies adopt a co-insurance clause, that is specified in the policy form; not a few homeowners who are going to sign the contract are unaware of this essential component, paying (in all senses) the consequences, sometimes and sadly because also of a merciless insurer.
So, let’s see what this clause means and why should care about it.
When you buy insurance for your house, you do it to fully cover the expenses of repair/replacement in the case of a hazard: this is the fundamental purpose. However, the insured party may want to save on the policy cost sacrificing the bought amount of coverage: this is where co-insurance plays its cards.
You become a co-insurer when you are accepting to share the costs of home damage with the insurer, instead of being 100% compensated.
The coinsurance clause is there to encourage you to select a sufficient amount of coverage, especially for home replacement cost; co-insurance applies a percentage of the insurable property value to determine the payout in the case of a sub-optimal coverage, usually up to 80%. For instance, if you own a house worth $250,000, you can’t choose just $200,000 of dwelling coverage: if you did, the payout of losses will be managed according to the set percentage. That means if it’s 50%, in this case, you would only be indemnified for 50%($200,000)=$100,000: as you can see, this poses a big risk to your future financial condition.
Clauses are different depending on the insurance company, but generally, as a co-insurer, you can be called to put 20% of the expenses out of your pocket, which is still a massive amount of money.
There are common situations where you might not know about the coinsurance, and decide to buy less coverage for the house.
When a loss occurred, you would face unexpected and remarkable costs, blaming the insurance company: this can be true if the insurer doesn’t tell you about the existence of the clause, or rather to explain it well, or yet, advising you to choose an adequate coverage limit.
In all these cases, you can take a countermeasure by hiring a public adjuster, a dedicated professional who defends homeowners from fraudulent or negligent insurers: he will process your claim and be on your side as a witnesser. You may alternatively choose a lawyer who has a clear understanding of how insurance works.
With recognized and consolidated companies, it is not likely that such things happen, unless you omitted reading lines of your contract, and that will be clearly your fault.
On the other hand, some insurers may try to abuse and push on the application of the clause, even where it doesn’t.
That’s why it’s always recommended to do your research, about clients’ good ratings and complaints, and finally, make your choice of the best insurance companies available.