Introduction to Coinsurance in Property Insurance
In the world of property and casualty insurance, particularly for the Florida 2-20 General Lines Exam, understanding coinsurance is critical. Coinsurance is a provision found in many property insurance policies that encourages the policyholder to insure their property to a certain percentage of its actual value. Typically, this requirement is 80%, though it can be 90% or even 100%.
The fundamental purpose of coinsurance is to ensure that premiums are equitable. Since most property losses are partial rather than total, a policyholder who only insures for 50% of the property's value but pays the same rate as someone insuring for 100% would be getting a disproportionate benefit. If you fail to meet the insurance-to-value requirement, you become a 'co-insurer' and must share in the loss. For more background on property principles, check out our complete FL 2-20 exam guide.
The Core Components of the Coinsurance Formula
The Step-by-Step Coinsurance Formula
To calculate the amount an insurance company will pay for a partial loss when a coinsurance clause is present, we use the famous 'Did / Should' formula. Follow these steps to solve any coinsurance problem on your exam:
- Step 1: Determine the 'Did' – This is the actual limit of insurance the policyholder purchased (found on the Declarations page).
- Step 2: Calculate the 'Should' – Take the replacement cost (or actual cash value, depending on the policy type) of the property at the time of loss and multiply it by the coinsurance percentage required by the policy.
- Step 3: Divide 'Did' by 'Should' – This gives you the fraction of the loss the insurer is responsible for. If this number is 1.0 or higher, the requirement is met.
- Step 4: Multiply by the Loss – Multiply that fraction by the total amount of the covered loss.
- Step 5: Subtract the Deductible – Always apply the deductible after the coinsurance calculation to find the final check amount.
Remember, the insurance company will never pay more than the limit of the policy ('Did') or more than the actual amount of the loss.
Example: Meeting vs. Failing Coinsurance
| Feature | Scenario A (Requirement Met) | Scenario B (Requirement Not Met) |
|---|---|---|
| Property Value | $200,000 | $200,000 |
| Coinsurance Requirement | 80% ($160k) | 80% ($160k) |
| Insurance Carried (Did) | $160,000 | $100,000 |
| Amount of Loss | $40,000 | $40,000 |
| Calculation | 160/160 = 100% of loss | 100/160 = 62.5% of loss |
| Claim Payment | $40,000 (minus ded.) | $25,000 (minus ded.) |
Common Exam Pitfalls and Tips
When practicing practice FL 2-20 questions, students often make the same mistakes. Here are a few things to watch out for:
- Value at Time of Loss: The coinsurance calculation is based on the value of the property at the time the loss occurs, not when the policy was originally written. If property values have risen due to inflation, a policyholder who was once compliant may now face a penalty.
- The Deductible: In standard property insurance math for the 2-20 exam, apply the coinsurance penalty first, then subtract the deductible from the resulting amount.
- Total Losses: If the loss is total (the building is completely destroyed), the coinsurance clause is usually ignored, and the policy pays the face amount (Limit of Insurance) under the Florida Valued Policy Law.
- Rounding: Be careful with decimal points. A small rounding error early in the 'Did/Should' division can lead to a significantly wrong answer.
The 'Did over Should' Rule of Thumb
If the Did is less than the Should, the insured will always receive less than the full amount of a partial loss. This reduction is known as the coinsurance penalty. If the Did is equal to or greater than the Should, the insurer pays the loss in full (up to the policy limit).
Frequently Asked Questions
If your 'Did' is higher than your 'Should', you have met the requirement. The insurer will pay 100% of your partial losses (minus the deductible) up to the limit of insurance you purchased.
Generally, no. Under the Florida Valued Policy Law, if a total loss occurs to a building, the insurer must pay the full policy limit regardless of the coinsurance calculation, provided the loss was caused by a covered peril.
Insurers often offer a premium discount for higher coinsurance percentages. By agreeing to insure closer to the full value of the property, the policyholder reduces the insurer's risk of 'under-insurance,' resulting in a lower rate per $100 of coverage.
For the purposes of the Florida 2-20 exam, the coinsurance penalty is calculated first. The deductible is then subtracted from the amount the insurer would have otherwise paid. Formula: [(Did / Should) x Loss] - Deductible = Claim Payment.