The Two Meanings of Coinsurance and What They Mean for Small Business


Is your business at risk if you don’t have it?

As a business owner, you’ve made sure that your company is properly insured. Whatever kind of coverage you’ve chosen, you have probably heard about many different types of business policies and while many of them may be useful to you, others may not. But as experts in the business, we’d like to give you some insight into those insurance solutions that may be confusing but can be of value to you. So here’s a look at coinsurance, what it means and how it applies to your company:

What is coinsurance?

There’s actually two different meanings to this term and that’s one of the reasons why it’s often confusing for people. Here are the two different definitions:
  1. Insurance provided by more than one party: When two or more insurance providers jointly cover a person or an entity
  1. Insurance that has required amounts of coverage: Some insurance carriers require their customers to have policies that cover a certain limit for what they’re insuring based on the value of the entity. This means that your policy will have a coinsurance clause that stipulates how much coverage your business or property requires in order to be reimbursed for a loss. 

How it works

Even with these explanations, coinsurance is still a bit confusing to most people. Here’s an example of how it works:
Let’s say you have $200,000 in assets and your insurance provider requires a coinsurance rate of 80%. If you didn’t purchase the total 80% of coverage and a fire breaks out in the building and causes damage, you may not receive the total value of your damages because you didn’t adhere to the co-insurance requirements. In other words, if you fail to meet the coinsurance requirements, your insurance company has the right to refuse to pay out the total amount of damages.

The purpose of coinsurance

For insurance companies, it’s a way to make sure that you have the right amount of coverage. As experts, they know what can happen and how much damage certain unforeseen events can cause. They also want to make sure that if something does happen, they’re able to cover the claim—by requiring coinsurance, they’re protecting their pool of resources which, in the end, serves you. Coinsurance is also a way that insurance companies can ensure that their clients are getting fair and accurate assessments on the value of their businesses. 

Does your company need coinsurance?

While in many policies it’s written within a separate clause, not all insurance providers require coinsurance. The benefit of having coinsurance is of course the obvious: you will be covered for the full amount of damages when and if something unexpected happens. If you consider the amount you’d have to pay out of pocket versus the cost of a monthly premium, you are likely to understand the value of this type of coverage. If you’re not sure whether your general liability policy includes coinsurance or are in the market for a new provider, contact us today.