Property Insurance: Don't get blindsided by a Co-Insurance Penalty!

Coinsurance as it relates to Property Insurance is an easily misunderstood concept.  Most people, naturally, think of the coinsurance requirement of their health insurance (e.g. how much of the claim will I have to pay)  However, with property insurance, it is an entirely different concept.  It is the Insurance company’s way of stating, "we want you to Insure your building for a minimum of  "X" percentage of the Replacement Cost Value".  "X" is commonly 80% but can be higher. Then they say, "If at the time of loss your Property is not Insured for at least 80% of the value,  you will suffer a coinsurance penalty." The penalty is a reduction in claim payment. The higher the Coinsurance Percentage, the more likely a penalty, since there is less margin for error.

Coinsurance Penalty = the amount your claim payment will be reduced (e.g. if you were required to Insure your building for 80% of it's value and it was only insured for 70%, your claim payment will be reduced by 10%).

To keep things simple, let’s take an example using a Coinsurance requirement of 100%:

• You have a Building that is Insured for: $500,000

• There is a fire that causes $150,000 of damage

• At the time of Loss the Insurance Company determines the Replacement Cost value of your building to be $1,000,000*

• So you are underinsured by 50% ($1mil/$500k)

• Since you are underinsured by 50% any claim payments will be reduced by 50%

• In this example your total claim payment would be $75,000 minus deductible.  See, the total claim was $150,000 - 50% penalty ($75,000) = $75,000 

*While this big of a difference is not common for newer buildings, for older buildings that have been renovated to very high end homes/offices, it is not unusual.

Coinsurance penalties are especially common for young or fast growing companies that may start taking on material or inventory faster than they had originally estimated.  Keep this in mind as you grow, so that you can update your policy and avoid a penalty.  If your agent does not reach out to you at least annually to help avoid this, find one that does (poster points thumb at self).

 

posted by Dan Hebbeln: dan@hebbeln-ins.com