We get many calls from homeowners who have looked at their homeowners dwelling coverage amount and say “I couldn’t sell my house for that much! Please reduce the dwelling coverage.” These calls have increased in recent years with the depressed real estate market. It is important for homeowners to understand that the dwelling coverage amount is how much it would cost to rebuild their home, the Replacement Cost Value (RCV), not the market value.
Some agents have made the coverage reductions without fully explaining the consequences. As a result, many homeowners are underinsured with their current policies and will be affected by the Coinsurance clause of their policy.
International Risk Management Institute definition of coinsurance is:
"A property insurance provision that penalizes the insured's loss recovery if the limit of insurance purchased by the insured is not at least equal to a specified percentage (commonly 80 percent) of the value of the insured property. The coinsurance provision specifies that the insured will recover no more than the following: the amount of the loss multiplied by the ratio of the amount of insurance purchased (the limit of insurance) to the amount of insurance required (the value of the property on the date of loss multiplied by the coinsurance percentage), less the deductible."
If a Coinsurance percentage is shown in the Declarations, the following condition applies
a. We will not pay the full amount of any "loss" if the value of Covered Property at the time of "loss" times the Coinsurance percentage shown for it in the Declarations is greater than the Limit of Insurance for the property. Instead, we will determine the most we will pay using the following steps:
(1) Multiply the value of Covered Property at the time of "loss" by the Coinsurance percentage;
(2) Divide the Limit of Insurance of the property by the figure determined in step (1);
(3) Multiply to the total amount of "loss", before the application of any deductible, by the figure determined in step (2); and
(4) Subtract the deductible from the figure determined in step (3)
We will pay the amount determined in step (4) or the Limit of Insurance, whichever is less. For the remainder, you will either have to rely on other insurance or absorb the "loss" yourself
The Florida Statute 627.701 details the legal requirements for Liability of insureds, coinsurance and deductibles.
Sam and Sue have a home with a Replacement Cost Value (RCV) of $200,000. They purchased the house in 1989 and have maintained dwelling coverage is $96,000 since then. In 2014, they suffer a $40,000 covered loss to the property.
- Multiply the value of the covered property ($200,000) by the coinsurance percentage (80%) = $160,000. This is the least amount of coverage Sam and Sue should have had in place to avoid the coinsurance penalty.
- Divide the limit of insurance of the property ($96,000) by the figure determined in step 1 ($160,000) = 60%
- Multiply the total amount of the loss ($40,000) by the figure determined in step 2 (60%) = $24,000
- Subtract the deductible ($1,000) from the amount determined in step 3 ($26,400) = $23,000
Many homes are underinsured due to several circumstances.
· Some were purchased many years ago and the dwelling coverage amount has not kept up with the increased costs to replace the building.
· Others are underinsured by an agent’s attempt to meet a desired premium payment for the client without explaining the coinsurance penalty to the homeowner.
· Some property owners are intentionally underinsured, with knowledge and understanding of the coinsurance penalty, and do so as a method of self-insuring.
Many homeowners insurance carriers will not accept a policy that is for less than the RCV. These policies will not have a coinsurance clause however the homeowner is expected to insure the dwelling for 100% of RCV. This greatly reduces the selection of carriers that an agent can present. While premiums may be lower than a full RCV policy, the clients premium dollar to coverage dollar ratio may be unfavorable.
If you have any questions about your coverage, please give us a call at 727-894-5555