Home Insurance Coinsurance Clause: Verify the Insured Amount
Check the minimum percentage required by the coinsurance clause and the reconstruction value used in the calculation.
In this article
The coinsurance clause sleeps in most home policies and wakes up at a partial loss, the kind most owners will face. Here is how it works. The insured amount must reach a minimum percentage of the reconstruction value, often 80%. Below that, the settlement on any partial loss is reduced in proportion to the shortfall. A $60,000 kitchen fire is then reimbursed only in part, and the deductible comes on top. The penalty hits the frequent losses, not just the total one, so underinsurance is costly long before a catastrophe. To check the threshold, get an up-to-date reconstruction appraisal using the insurer's tool. Years without adjustment and undeclared renovations widen the gap quietly. Keep the dated appraisal on file, as evidence in case of a disagreement. This article explains the penalty calculation with worked examples, the threshold check and the update that closes the gap.
Find the percentage the contract requires
A coinsurance clause requires you to insure the building for at least a certain percentage of its rebuilding value, generally 80, 90 or 100%. That percentage appears in the policy's particular conditions, often on a discreet line, and it varies from one contract to another. Read it first, because it sets the threshold below which any settlement will be reduced. Take a 90% policy on a building that would cost $400,000 to rebuild. It requires an insured amount of at least $360,000.
Use the right rebuilding value
The clause is calculated on the rebuilding value on the day of the loss, not on the day the policy was taken out. That detail is what makes the clause dangerous. An insured amount that was perfectly adequate five years ago can fall below the threshold today, simply because construction costs have risen, even though the building has not changed. The valuation used must therefore be recent and reflect current material and labour costs in your region. Both have moved a lot in recent years.
Understand the proportional reduction
The penalty is not a refusal to pay, but a reduction in proportion to the shortfall. Take a building insured for $300,000 when the clause required $360,000. The ratio is 83%, and it applies to the settlement. A partial loss of $50,000 is then reimbursed at only about $41,000, less the deductible. This mechanism surprises people because it hits partial losses, which are the vast majority, while everyone pictures underinsurance as a problem of total losses.
Keep a current valuation on file
One practice protects against this risk: have a rebuilding cost valuation prepared, keep it, and update it every three or four years and after each major renovation. Many insurers provide this valuation at no charge and offer automatic indexing. Check that it truly tracks construction costs rather than a general price index. Some policies replace the clause with a replacement-cost guarantee with no coinsurance. Where that option exists, it removes the whole problem, and it is worth asking for at renewal. Ask the question.
Quebec scenario
Rereading his policy before renewal, a teacher in Magog comes across an 80% coinsurance clause. He realizes he has never understood it in fifteen years of coverage. His broker explains it with an example he will not forget. The clause requires the insured amount to reach at least 80% of the reconstruction value. Below that, the insurer may reduce the payout on any partial loss in proportion to the shortfall. His house would cost $400,000 to rebuild, so the threshold is $320,000. Yet his contract, never adjusted since he bought, shows $260,000. A $60,000 partial loss, such as a kitchen fire, would not be paid $60,000. The settlement would be prorated, 260,000 over 320,000, or about $48,750 minus the deductible. The penalty hits partial losses, by far the most frequent, and not only total ones. The correction follows the diagnosis. An updated reconstruction appraisal, redone with the insurer's tool, puts the cost at $405,000. The insured amount is raised accordingly, and the premium goes up $210 a year. That is the price of a contract that will pay what it promises. The dated appraisal goes into the file, useful in any future disagreement. One line joins his renewal ritual: check that the contract's automatic indexing has kept pace with real costs, because the coinsurance clause does not forgive forgotten years of inflation.
Checklist
- Find your policy's coinsurance clause
- Note the minimum required percentage
- Obtain an up-to-date reconstruction appraisal
- Compare the insured amount with the threshold
- Understand the pro-rata reduction of partial losses
- Adjust the insured amount without delay
- Accept the premium of a contract that will pay
- Keep the dated appraisal as evidence
- Verify the threshold at every renewal
The questions we get
A question about your situation?
A Quebec broker answers, with no commitment.
Read next
// Insurance
Reconstruction Cost: Do Not Confuse It With Market Value
Insure the reconstruction cost, based on materials, labour and the building’s features, not the market value.
// Insurance
Vacant or Unoccupied Home: Notify the Insurer
Read the policy’s definition of vacant and unoccupied and the number of days before restrictions apply.
// Insurance
Home Insurance: Build a Property Inventory
Photograph each room, record serial numbers and keep receipts for important property before a loss occurs.