Economics Bullshit 101: Co-insurance Clauses

Over the past few years I've been trying to build up my understanding of economics, and along the way I've come across a few things that are apparently standard practice that just seem like bullshit. Since I've just started a course on finance and such, I'm coming across a few more, and I feel like sharing. So here's the first installment of Economics Bullshit 101, Co-insurance.

Co-insurance is a practice that mainly affects insurance policies on big ticket items, like homes. Lets say I have a home that's worth $1,000,000 (sure, it's not going to happen anytime soon, but this is a hypothetical), and insurance to cover that much seems a bit too expensive to me. So, I cut a few corners, and insure the house for up to $800,000. Sure, I'll take a big hit if the house gets totaled, but I live in a pretty safe area and I'm not too worried.

So I've got my insurance, and while it doesn't cover the whole value, I'm feeling pretty safe. But then something bad happens. Nothing too major, but still pricey. All up, the bill comes to $100,000. No big deal, I'm insured up to $800,000, so that's well under my limit, no problemo.

Actually, problemo. Here's where the co-insurance clause kicks in. What it says is that when I said I wanted $800,000 worth of coverage on a $1,000,000 house, what I meant was that I wanted coverage of 80% on any damage. This means that when I put in my claim on the $100,000 worth of damage, they go "Fine, sure, $100,000 damage, 80% of that is $80,000, here's your cheque, have a nice day" and I look bamboozled and wonder where the hell the other $20,000 is. And I'm willing to bet they work that bit out before factoring in your excess, so there's another hunk of cash you don't get back.

Now, sure, I knew I was underinsured, but if I have coverage for up to amount X, and I claim for an amount Y that is less than X, I expect to get amount Y back from the insurers, regardless of whether amount Z, the value of the property insured, is greater or less than amount X. That's why I pay the insurer amount W every month.

So today's lesson is, like I guess many of these will be, read the god damn contract and make sure you understand it. And be sure you can afford the insurance if you buy a house.