Coinsurance Penalty

What Does Coinsurance Penalty Mean?

A coinsurance penalty is the amount that the insured must pay for a loss that the insurer will not cover due to insufficient coinsurance. This typically occurs when the value of the insurance purchased is less than the value of the property being covered.

Insuranceopedia Explains Coinsurance Penalty

The formula to calculate the claim in property insurance is:
(actual amount of insurance ÷ required amount of insurance) × amount of loss.

If the amount of insurance purchased is less than the required amount, the insured is responsible for covering part of the loss, resulting in a coinsurance penalty.

In Mr. X’s case:

• He insured the property for $60,000, but the property’s value is $90,000.
• The required amount of insurance based on the value is $90,000.
• The loss from the peril amounts to $30,000.

Using the formula:
($60,000 ÷ $90,000) × $30,000 = $20,000.

The insurer will pay only $20,000. Mr. X will need to pay the remaining $10,000 out of pocket, which serves as the coinsurance penalty.