The coinsurance clause is a requirement that you purchase a limit of insurance at least equal to some % of insured values.
So if you have an 80% coinsurance requirement on a $1,000,000 building you need to purchase a limit of at least $800,000. If you don’t and a loss occurs, they will calculate your amount of payment based on the coinsurance formula: [(amount the insured purchased ÷ the amount he should have purchased according to the coinsurance requirement)
× loss amount].
Put simply, the formula is [(did ÷ should) × loss amount]
If you try the calculation, you’ll notice that there is a penalty on the amount of compensation – try it and let me know.
Note that this penalty calculation does NOT apply to total losses or losses less than 2% of your limit or $5000. If your client has a total loss or a very small loss, it’s paid out normally (if you tried to apply the penalty formula to a total loss, you’ll notice that the insured actually gets more insurance than the limit they purchased).
Basically, the loss must be less than the limit of insurance purchased, but greater than 2% of the limit or $5000 for coinsurance to apply.
Coinsurance is a concept that appears in Fundamentals of Insurance / CAIB 1, RIBO 1, Alberta General Insurance Level 1, and CAIB 2 exams. There’s a ton of good information in the course but if you need more clarification, feel free to get in touch.