Coinsurance is an often misunderstood term and one that causes frequent dissatisfaction with insureds over claim settlements.

Most losses are partial losses. It is rare that the entire building or amount of covered property is totally destroyed. Knowing this, many individuals when insuring their business property seek limits for only part of its value. The insured reasons, if one is more likely to have a partial loss than a total loss, why spend premium on complete insurance?

This reasoning by insureds, of course, defeats the concept that insurance is the sharing of risk. The insured who does not insure total values is not sharing risk equally with other insureds. If most insureds chose to insure only part of the value of their property, the insurance industry would still have approximately the same number of claims to pay; however, the premiums that it collected to pay those claims would be vastly reduced. In order to have enough money to pay the losses, insurers would charge more for the lower values than insureds chose to insure. Those insureds who chose to insure the full value of their property would pay even more than they now pay for the same amount of coverage. Encouraging insureds to carry full insurance on their property allows premium levels to be fair.