Co-Insurance - What it is and How It Works During a Real Estate Investment Claim

Severe Storm

Co-insurance is an agreement with an insurance company to carry enough replacement insurance to cover a predetermined percentage of the property value if there is a loss. That percentage can vary from all the way to 90% of replacement cost.

For example, you own a fix and flip with a replacement cost of $250,000. Your insurance company requires you to carry co-insurance of 80%. That means you must carry a policy valued at a minimum of $200,000 for replacement cost.

But you decide to save on insurance coverage and only insure to $150,000. There is also a $5,000 deductible. Storms roll through town and cause a total loss of $250,000 – but your limit was $150,000 and you were supposed to carry $200,000 according to the 80% co-insurance agreement.

The ratio of the amount you carried as the owner divided by the amount required ($150,000/$200,000) is 0.75. Even though your loss was $250,000, the insurance company will only pay you $107,500 – the $112,500 minus the $5000 deductible. You must cover the $137,500 out of pocket.

Sometimes trying to save money on the front end, will cost you big when the claim is filed. Now imagine that number multiplied by multiple investment properties – and the losses can add up quickly and put you out of business by trying to save a little money. So make sure when you talk insurance and get numbers from your broker that you’re not selling yourself short by trying to save in the short term.