Last Updated on July 22, 2025 by Jacques Wong, B.Sc.
Coinsurance is a tricky concept for a lot of people.
Basically it’s a requirement that the insured purchase a limit of insurance of at least some % of insured values. Ex: $1,000,000 property w/ 70% coinsurance = a minimum limit of $700,000 required.
If he doesn’t, his payout would be penalized according to the coinsurance formula: (amount he did buy / amount he should have bought) x loss amount.
But coinsurance does not always apply. The waiver of coinsurance basically says that the coinsurance clause/penalty will only be applied to partial losses that are greater than 2% of his amount of insurance or $5000.
For example, if he bought a $350,000 limit and had a loss of $400,000, it’s a total loss (loss greater than the limit) and so coinsurance would not apply – he’d get $350,000.
If he had a loss of just $2000, its too small and therefore coinsurance would not apply – he’d get $2000. In plain language, coinsurance does not apply to losses that are too big (total) or too small (under 2% or $5000).
If he had a $100,000 loss, it’s not too small and not to big so coinsurance applies. Since he should have bought $700,000, his payout will be penalized. He would get (350k/700k) * 100k = $50k. He bought half of the insurance he was supposed to buy so he only gets half the money he should have gotten.
And yes you check the waiver before doing the math. Because if it’s waived, you won’t need to do the math anyways!!
Hope this explanation from another angle helps. In the meantime, here’s some home reading: https://www.pnclearning.com/2019/02/06/coinsurance/ (we write and publish explainers for key concepts from time to time do be sure to check there also).