Study guide
2.3 Coinsurance and the Coinsurance Formula
Arkansas Property & Casualty Insurance State
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1 Standalone Coverage Map
Standalone Coverage Map
2 Introduction: Arkansas Property & Casualty Insurance Exam Overview
Arkansas Property & Casualty Exam Overview
3 National Portion: Insurance Fundamentals
1.1 Risk, Hazards, Perils, and the Law of Large Numbers 1.2 Insurable Interest, Indemnity, and Other Insurance Principles 1.3 Insurance Contract Law and Elements 1.4 Policy Structure: Declarations, Insuring Agreement, Conditions, Exclusions 1.5 Parties, Agents vs. Brokers, and Authority
4 National Portion: Property Insurance Concepts
2.1 Causes of Loss / Named-Peril vs. Open-Peril 2.2 Valuation: ACV, Replacement Cost, and Functional Value 2.3 Coinsurance and the Coinsurance Formula 2.4 Deductibles, Limits, and Loss Settlement 2.5 Common Property Policy Conditions and Clauses
5 National Portion: Dwelling Policies (DP)
3.1 Dwelling Policy Forms DP-1, DP-2, DP-3 3.2 Dwelling Coverages A-E and Other Coverages 3.3 Dwelling Perils, Conditions, and Endorsements 3.4 Mobile Home and Specialized Dwelling Coverage
6 National Portion: Homeowners Policies - Forms & Section I
4.1 Homeowners Forms HO-2 through HO-8 and Eligibility 4.2 Section I Coverages A-D and Additional Coverages 4.3 Section I Perils Insured Against and Exclusions 4.4 Replacement Cost vs. ACV and Loss Settlement in Homeowners
7 National Portion: Homeowners Policies - Section II & Endorsements
5.1 Section II Coverages E (Liability) and F (Medical Payments) 5.2 Homeowners Conditions and Duties After Loss 5.3 Common Homeowners Endorsements (scheduled property, water backup, ordinance or law)
8 National Portion: Personal Auto Policy - Liability & Injury
6.1 Personal Auto Policy Structure and Eligibility 6.2 Part A Liability and Supplementary Payments 6.3 Part B Medical Payments 6.4 Part C Uninsured/Underinsured Motorists
9 National Portion: Personal Auto Policy - Physical Damage & Duties
7.1 Part D: Coverage for Damage to Your Auto 7.2 Exclusions and Part E: Duties After an Accident 7.3 Part F: General Provisions, Endorsements, and No-Fault Concepts
10 National Portion: Liability Insurance Concepts
8.1 Negligence, Torts, and Legal Liability 8.2 Defenses, Damages, and Vicarious Liability 8.3 Occurrence vs. Claims-Made Triggers 8.4 Bodily Injury, Property Damage, and Personal/Advertising Injury
11 National Portion: Commercial Property Insurance
9.1 Commercial Package Policy Structure and Common Policy Conditions 9.2 Building and Personal Property Coverage Form (BPP) 9.3 Causes of Loss Forms (Basic, Broad, Special) 9.4 Business Income and Extra Expense 9.5 Commercial Property Endorsements and the BOP
12 National Portion: Commercial General Liability - Coverages
10.1 CGL Coverage A: Bodily Injury and Property Damage Liability 10.2 CGL Coverage B: Personal and Advertising Injury, Coverage C: Medical Payments 10.3 Who Is an Insured and Supplementary Payments
13 National Portion: Commercial General Liability - Limits, Triggers & Exclusions
11.1 CGL Limits of Insurance and Aggregates 11.2 Occurrence vs. Claims-Made CGL and Retroactive Dates 11.3 Key CGL Exclusions and Endorsements
14 National Portion: Commercial Auto Insurance
12.1 Business Auto Coverage Form and Covered Auto Symbols 12.2 Commercial Auto Liability and Physical Damage 12.3 Motor Carrier / Trucking and MCS-90 12.4 Garage Coverage Form and Garagekeepers 12.5 Commercial Auto Endorsements
15 National Portion: Workers Compensation
13.1 Workers Compensation Statutory Background and Benefits 13.2 Part One (Workers Comp) and Part Two (Employers Liability) 13.3 Premium Basis, Experience Modification, and Classification 13.4 Other States, USL&H, and Federal Acts 13.5 Workers Comp Exclusions and Endorsements
16 National Portion: Other Commercial Lines - BOP, Crime & Marine
14.1 Businessowners Policy (BOP) in Depth 14.2 Crime and Fidelity Coverage 14.3 Inland Marine and Nationwide Marine Definition 14.4 Ocean Marine Coverages (Hull, Cargo, Freight, P&I)
17 National Portion: Other Commercial Lines - Specialty & Professional
15.1 Farm and Agricultural Coverage 15.2 Commercial Umbrella and Excess Liability 15.3 Professional Liability and Errors & Omissions 15.4 Directors & Officers and Employment Practices Liability
18 National Portion: Other Commercial Lines - Surety, Flood & Specialty
16.1 Surety and Fidelity Bonds 16.2 National Flood Insurance Program (NFIP) 16.3 Cyber, Aviation, and Other Specialty Lines
19 National Portion: Insurance Regulation & Market Conduct
17.1 State Regulation, Licensing, and the McCarran-Ferguson Act 17.2 Rates, Forms, Solvency, and Guaranty Associations 17.3 Producer Authority, Fiduciary Duty, and Company Operations
20 National Portion: Ethics & Unfair Trade Practices
18.1 Unfair Trade Practices and Unfair Claims Settlement 18.2 Producer Ethics, Errors & Omissions Exposure, and Fiduciary Conduct 18.3 Privacy, Fraud, and Consumer Protection
21 Chapter 1: Arkansas P&C Insurance Regulation & Licensing
1.1 Arkansas Insurance Department 1.2 Arkansas P&C Producer Licensing Requirements 1.3 Arkansas Producer Responsibilities
22 Chapter 2: Arkansas Property Insurance
2.1 Arkansas Homeowners Insurance 2.2 Arkansas Commercial Property Insurance
23 Chapter 3: Arkansas Casualty & Auto Insurance
3.1 Arkansas Auto Insurance Requirements 3.2 Arkansas Liability Insurance 3.3 Arkansas Workers' Compensation Insurance
24 Chapter 4: Arkansas Ethics & Professional Conduct
4.1 Ethical Practices and Consumer Protection
2.3 Coinsurance and the Coinsurance Formula
Key Takeaways Explain This Topic AI
Coinsurance requires the insured to carry insurance equal to a stated percentage (usually 80%, 90%, or 100%) of the property's value at the time of loss.
Coinsurance formula: (Amount Carried ÷ Amount Required) × Loss = Claim payment, where Amount Required = Value × Coinsurance %.
The penalty applies to PARTIAL losses and reduces the payment proportionally; it does not punish the insurer's full payment of a properly insured total loss.
Payment is always capped at the lesser of the actual loss or the policy limit, and the deductible is subtracted afterward.
Agreed Value endorsements, inflation-guard, and annual value reviews are the standard defenses against a coinsurance penalty.
Last updated: June 2026
Why Coinsurance Exists
Most property losses are partial , not total. Without a penalty for underinsurance, an owner could insure a $500,000 building for only $100,000, pay a fraction of the premium, and still fully recover small partial losses — leaving the insurer collecting too little premium for the real exposure. The coinsurance clause fixes this by requiring the insured to carry coverage equal to a stated percentage of the property's value. Carry less, and the insured becomes a co-insurer who shares every partial loss.
Common coinsurance percentages: 80% (most common), 90% , and 100% . The higher the required percentage, the larger the premium credit — but the bigger the penalty for falling short.
The Coinsurance Formula Claim Payment = (Amount Carried / Amount Required) x Loss
- Term Meaning
- Amount Carried The policy limit actually purchased ("did")
- Amount Required Property Value × Coinsurance % ("should have")
- Loss The actual amount of the partial loss
Memory aid: “did over should, times the loss.” Two caps always apply afterward: the payment can never exceed the actual loss or the policy limit , whichever is less. The deductible is then subtracted from the result.
Example 1 — Requirement Met (No Penalty)
Building value $500,000 ; coinsurance 80% ; policy limit $400,000 ; loss $100,000 .
Amount Required = $500,000 × 80% = $400,000 .
Ratio = $400,000 ÷ $400,000 = 100% .
Claim = 100% × $100,000 = $100,000 — the full loss is paid (less any deductible).
Example 2 — Underinsured (Penalty Applies)
Same building and 80% requirement, but the owner carries only $300,000 ; loss $100,000 .
Amount Required = $400,000 ; Amount Carried = $300,000 .
Ratio = $300,000 ÷ $400,000 = 75% .
Claim = 75% × $100,000 = $75,000 .
The insured absorbs the $25,000 shortfall as a co-insurer penalty.