A clause in an insurance policy requiring an insured to carry a certain percentage (usually 80, 90 or 100%) of insurance in relation to the value of the property insured. The insured shares in losses to the extent that he is underinsured at the time of loss. Under the terms of this clause, property must be insured in an amount equal to or exceeding 90% of its insurable value. Failure to do so will result in a penalty in the event of a loss. The manner in which the 90% co-insurance clause would operate is illustrated in the following hypothetical example.
A) Owned Instruments/Equipment is insured on a replacement cost basis for $60,000.
B) Actual cost to replace the Owned Instruments/Equipment is $100,000.
C) Minimum amount of insurance required to satisfy the 90% co-insurance clause is $90,000. (90% of B)
D) Amount of loss $50,000.
Application of co-insurance clause:
Amount of insurance carried X Amount of loss = Recovery
Amount of insured required
$60,000. (A) X $50,000 (D) = $33,333.33
This example clearly illustrates the necessity of insurance to value. Note the amount of recovery never exceeds the amount of insurance carried. For this reason it is important to insure for 100% of the insurable value in order to have enough coverage in the event of a total loss.