Co-Insurance Clause
Most homeowners’ insurance policies contain a co-insurance clause. This provision usually requires that the owner maintain insurance equal to a specified percentage (usually 80 percent) of the replacement cost of the dwelling (not including the price of the land). An owner who has this type of policy may make a claim for the full cost of the repair or replacement of the damaged property without deduction for depreciation or annual wear and tear.
Examples of Claim Calculations
A homeowners’ insurance policy is for 80 percent of the replacement cost of the home, or $80,000. The home is valued at $100,000, and the land is valued at $40,000. The homeowner sustains $30,000 in fire damage to the house. The homeowner can make a claim for the full cost of the repair or replacement of the damaged property without a deduction for depreciation. However, if the owner has insurance of only $70,000, the claim will be handled in one of two ways, The owner will receive either actual cash value (replacement cost of $30,000 less depreciation cost of say $3,000, or $27,000), or the claim will be prorated by dividing the percentage of replacement cost actually covered (0.70) by the policy minimum coverage requirement (0.80). So, 0.70 divided by 0.80 equals 0.875, and $30,000 multiplied by 0.875 equals $26,250.
Subrogation
A third party, such as an insurance company, often settles any covered insurance claim. When this happens, the third party generally acquires the right to any legal damages available to the insured. This right is called subrogation. (In other words, if a house burns down due to a utility company’s negligence, and the insured accepts compensation from the insurance company, then the insurance company gains the rights related to possible further payment for damages from the utility company.)
