What happens if I don't insure my home to full replacement cost?
Most insurance companies require you to insure your home to between 80 and 90 percent of it's full replacement cost value. If you decide to understate the value of your property and choose a dwelling coverage amount that is below the 80 percent level, your treading dangerous waters.
The coinsurance clause in a property policy is used to protect insurance companies against policy holders' tendency to under estimate the replacement cost of their homes to reduce premiums.
This clause implores homeowners to insure to at least 80 percent of replacement cost value by adding a penalty to those who venture below the required level.
Here's how it works: if you fall below the 80% (or whatever is specified in your policy) a multiplier is determined by dividing the amount the policy holder did insure by the minimum required value. That multiplier is then applied to the value of a loss to determine the insurance companies liability.
More information on how your replacement cost is determined
Lets illustrate this by using a home with a full replacement cost value of $250,000, where the insured wanted to insure for only $150,000:
| Full replacement cost (100%) | $250,000 |
|
Co-insurance clause requirement |
80% |
| Minimum coverage required to meet co-insurance clause | $200,000 |
| Chosen replacement cost coverage (only 60%) | $150,000 |
| Multiplier | $150/$200=.75 |
| Deductible | $1000 |
Because the homeowner chose to insure their home for less than 80 percent of the full replacement costs value, a multiplier (.75) will now be applied to any loss.
The result:
A tree falls of the roof and does $50,000 worth of damage.
$50,000 X (times) .75 = $37,500
minus $1000 deductible = $36,500 total payout on claim.
Because you violated the co-insurance clause your insurance company will apply the multiplier to any loss. Imagine if your home burned down and you only receive 75% (or less) of the necessary money to rebuild it!
