DEFINITION of 'Waiver Of Coinsurance Clause '
Language in an insurance policy that says the insurance company will not require application of the part of the policy that divides responsibility for an insured loss between the insurance company and the policyholder. The coinsurance clause is usually only waived for small losses, such as losses under $10,000. Coinsurance helps to guard against the moral hazard that the policyholder will not purchase sufficient insurance to cover a total loss in order to save money on insurance premiums.
BREAKING DOWN 'Waiver Of Coinsurance Clause '
A coinsurance clause requires the policyholder to insure a certain minimum percentage of the property's actual value, such as 80%. Thus, if a building was worth $200,000, the property owner would have to purchase $160,000 of insurance on it. In the event of a total loss, the policy would pay $160,000 and the building owner would be responsible for the remaining $40,000. If, however, the property were really worth $300,000, the building should have been insured for at least 80% or $240,000. Since the owner is only insured for $160,000 when he should be insured for $240,000, he is underinsured and would face a penalty in the event of a loss, unless he has a waiver of coinsurance clause.