In some cases an insurer and the policy holder agree to share the risk involved in a policy. Coinsurance is where the client and the insurer each assume a portion of the risk in the event that a benefit is paid. It normally works like this – the client will pay their deductible first and then the insurer will pay out a percentage of the costs of repair/replacement/compensation incurred and the insured party will pay out the rest.
The percentages covered by each party will be defined in the insurance contract and it’s important for policy holders who have coinsurance to understand their obligations under that contract.
In international insurance, coinsurance is different, it describes the act where two or more insurance companies share the risk of an insurance contract.
How would coinsurance work?
It’s perhaps easiest to understand coinsurance with a worked example;
Let’s say you want to insure your truck against fire and theft on a coinsurance basis, and that the truck is valued at $100,000. The insurer would typically offer to assume 80% of the risk in such an instance, and the policy holder would then be responsible for the balance.
If the truck is the stolen and not recovered by police (it is a good idea for policy holders to install anti-theft tracking devices, which dramatically increase the chances of recovery and reduce the costs of insuring against theft), then the policy would be expected to pay out the benefits.
If the deductible was $10,000 (for example) – the remaining amount would be $90,000 and the insurance company would be expected to pay 80% of this sum as a benefit, so they would pay out the 80% of $90,000 which is $72,000. The policy holder would be expected to find the remaining 20%, (20% of $90,000 is $18,000) and pay this themselves.
So in this example the policy holder would be liable for costs of $28,000 and the insurer would be responsible for $72,000.
It is important for the policy holder to understand both the deductible and the level of coinsurance provided by the insurance company in order to know their own level of risk exposure.
Additionally if you have financing on your vehicle, most insurance policies of this type will only cover the actual value of the vehicle, so you may find you have additional risk exposure to the hire-purchase company in excess of the value of the vehicle, if this is the case you may wish to investigate gap insurance to reduce this risk.