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In general terms, a coinsurance clause splits or spreads the assumption of risk between the insured and the insurer. Rather than assume 100% of the risk, a coinsurance clause allows the insurer to assign a percentage to the insured. This type of clause can also require the insured to carry a minimum amount of coverage or risk a coinsurance penalty. How a coinsurance clause functions depends on the type of insurance involved, whether health, property, title, and so on.
These types of clauses are commonly found in health insurance agreements. In some cases, copayment and coinsurance are used interchangeably but these terms actually refer to different concepts. A copayment is often a predetermined, fixed amount that the insured will pay upon receiving medical services. This amount does not vary, no matter the cost of the service received. For example, a visit to a hospital’s emergency room can require a copayment of a predetermined fee regardless of what services are necessary. Filling a prescription, an eye exam, or a dental cleaning also often require a fixed copayment from the insured.
In contrast, coinsurance in health insurance is a percentage above the deductible of a medical service that the insured pays. The amount due will depend on how much the service costs. Coinsurance is often stated as a pair of percentages, and the most common schemes are 70-30, 80-20, and 90-10. The insurer is responsible for paying the first percentage and the insured the second. For example, under a 90-10 coinsurance clause, the insurer will pay 90% of a medical expense, while the insured individual pays the remaining 10%.
In a typical health insurance coinsurance clause, the insured is never required to cover more than 50% of a medical expense. To guard against the insured having to pay an extreme amount in the event of a serious medical problem — such as cancer — that requires expensive and lengthy treatment, most clauses include a stop-loss limit, or ceiling for the insured. In other words, regardless of the percentages specified in the coinsurance clause, the insurer will pay 100% of any costs once the insured’s out-of-pocket expenses reach that stop-loss limit.
A coinsurance clause can also function as a penalty imposed on a party for not carrying a minimum amount of coverage. This type of clause is common in property insurance agreements. For example, if the insured rental property owner carries only 50% of the minimum required coverage, the insurer will only pay 50% recovery in the event of a loss. In other words, the coinsurance clause will reduce the recovery payment by the insurance shortfall percentage. These clauses function similarly in title insurance.