Assume Karen Francis had a homeowner's insurance policy with $150,000 of coverage on the dwelling. Would a 90% co-insurance clause be better than an 80% clause in such a policy? Give reasons to support your answer.
coinsurance is a device used primarily in property policies whereby an insured agrees to cover property to a certain percentage of either its actual cash value or its replacement cost. Actual cash value being defined as replacement cost less physical depreciation. Rarely see it anymore in a homeowners form...generally as the agreement gets closer to 100% of either the ACV or Replacement cost the insured is given a lower rate so the rate may be say 5% less at 90% co and 10% less at 100% co. If you do not have the proper percentage and suffer a partial loss you may suffer a penalty on a claim based on the amount insured vs the amount you should have insured times the amount of loss. So say the replacement value is 200,000 and your policy limit is 150,000. At 90 % co you had agreed to cover 180,000 ie .90 x 200,000, at 80% co you agreed to 160,000 each would result in a penalty . The trade off is at 90% your rate should be lower.