Coinsurance is a term used in the insurance industry that refers to the sharing of risk.  Depending on the line of business, coinsurance can have different meanings.

When used in relations to health care insurance, coinsurance refers to a pre-agreed cost-sharing arrangement.  After the insured has met their deductible, coinsurance defines the cost-sharing split between the insurer and the insured up to a certain threshold.

 

In the Property & Casualty insurance sector, coinsurance can be used to identify the spread of risk between two insurance companies.  It is also used to establish limits for buildings and other property (primarily commercial.)  While the usage is somewhat counter-intuitive, the process is designed in the best interest of the insured.

Typically you will see the insurance clause in a commercial property policy set at 100% coinsurance, 90% coinsurance, and 80% coinsurance. At first blush, it would appear that 100% coinsurance was the most conservative choice why at 80% coinsurance the insured might be exposed to 20% of the loss.  THIS IS INCORRECT.

At 100% coinsurance, the insured has coverage up to the limit stated in the policy.  That’s okay, right? It’s  okay until the replacement cost exceeds the limit.  Then the insured is on the hook for the difference.

At 80% coinsurance, the insured has the ability to protect themselves from have a replacement cost  estimate that is too low.  An 80% coinsurance clause gives the additional protection.  At 80% coinsurance, the limit on the structure is now effectively 125% (100/80) of the stated value.