Deductibles and Coinsurance

Back to: TelaClaims Adjuster I – Insurance Basics for Adjusting a Claim

Deductible

In insurance a deductible is used in every type of insurance policy, A deductible is an amount the policyholder must pay out of pocket before the insurer will pay for losses. The deductible is designed to filter minor and inexpensive claims for the insured and there are three different types of deductibles.

Fixed Deductible

A fixed deductible is a specific set amount deductible that can vary depending on the coverages provided in the policy.

Percentage Deductible

A Percentage Deductible is a deductible that the insured pays a percentage of the insured risk’s value, some policies will actually combine fixed and percentage deductible and will apply different deductibles to different covered losses in the policy. For example, a daily water claim may have a fixed deductible of $500.00 while the deductible for wind and hurricane losses may be 2% of the property’s value.

Franchise Deductible

A Franchise Deductible is a deductible that is a pre-determined amount, the difference with this deductible is that if losses are below the deductible, the insurer pays nothing. However, if a loss is above the deductible then the insurer will pay 100% of the damage. An example would be if an insured has a franchise deductible of $1200.00 if the insured has a loss of $800.00 the insured would not receive any money at all however if the insured has a loss of $ 1800.00, the insured will not have to pay a dime as the insurer will pay the loss in the full amount of $1,800.00.

Coinsurance 

Coinsurance is a tool insurer’s use to encourage the insured to purchase an adequate amount of coverage. This financially protects the insurer while imposing a penalty on coverage for partial losses if the property is not fully insured. This penalty is typically an 80% reduction of the Real Cash Value of a claim

Understanding Coinsurance Penalties

If as a home is Underinsured then that means the home is insured for less than 80% of its value

If a property is underinsured then the property will be subject to a Coinsurance Penalty which means that the insurer will only cover a percentage of partial losses.

Applying a Coinsurance Penalty

First, when dealing with Coinsurance you must always subtract the deductible first. After subtracting the deductible from the covered loss amount you apply the coinsurance formula which is

Policy Limit/Coinsurance Requirement Times the value of the loss which will give you the percentage of coinsurance required

Let’s take a look at an example to better understand how and when a coinsurance penalty applies

Value of John’s home: $100,000

Minimum coinsurance amount: $80,000

John’s Deductible: $2,000

Johns actual coverage $40,000

Loss Amount of 12,000

First, we would subtract the deductible from the loss amount making the loss $10,000

so we would use the equation

“Had” / “Should” X partial loss= Indemnity

40,000/80,000 X 10,000= $5,000

As you can see the insured was only insured for 50% of the necessary amount they had to be insured for thus, were only paid for 50% of the partial loss.