If you’ve ever read through your company’s insurance policy, you may have noticed a coinsurance clause. Coinsurance can be found in most commercial property policies and some business insurance, errors and omissions and directors and officers policies. It is usually found in the policy conditions section of your commercial policy.
What is the coinsurance clause?
The coinsurance clause requires the policyholder to carry a limit of insurance equal to a specified percentage of the total value of your property. The standard percentage is usually 80%, but can also be 90% or 100%. If the policyholder purchases an inadequate amount of insurance, you will become responsible for a share of the loss and will not receive full payment for your claim.
You may only want to purchase insurance for the amount that you think you would be most likely to pay in a loss scenario, rather than purchasing for the total replacement cost of your building. This creates an issue where many people are likely to underestimate their likely risk of loss, leaving insurance companies with a smaller amount of money available to pay claims. Coinsurance was created to protect the marketplace and prevent imbalances in premiums collected from policyholders. It is also used to encourage the insured to carry a suitable amount of insurance relative to the value of their property.
Why is it bad if I under-insure my property?
If you choose to under-purchase your insurance, you may be responsible for a portion of your claim. For example, if your building has a replacement cost of $1,000,000 and your policy states that the amount of insurance that must be purchased for your building (the coinsurance percentage) is equal to 80% of the value of the insured property, your coverage limit must then equal to $800,000 or greater to have your claim paid up to your policy limit.
If you decide you want to insure your building for less than the coinsurance requirement, you will be required to pay for a proportion of the loss if a claim occurs. Let’s say, you insure your property for $700,000 or 70% of the replacement cost. Your building suffers a fire that causes $300,000 in damages. If you purchased $700,000 in coverage, you should be covered, right? Unfortunately, this isn’t usually the case.
To calculate the amount you would receive in a claim in this scenario, divide the amount of insurance purchased ($700,000) by the coverage limit set by your coinsurance percentage ($800,000). The percentage from your calculation (87.5) is then multiplied by the amount of the loss ($300,000 x .875 = $262,000). In this scenario, you would receive $262,000 (minus your deductible) for a $300,000 damage claim.
One alternative to coinsurance is to purchase an agreed value coverage endorsement. This clause requires you to submit a signed statement of values expressed as replacement cost or actual cash value, whichever you choose to select. It will apply for the one-year policy period and will suspend the requirement of the coinsurance clause. If you would like this coverage to continue following your policy term, you will need to submit a new statement of values before your policy renews.
It is important to take the time to understand coinsurance and the impact it can have on your coverage in the event of a claim. Knowing the most up-to-date value of your property will ensure that you always hold an adequate amount of insurance.
Want to know more? Get in touch with one of the brokers at Fuse Insurance who can provide a new quote or review your current insurance program to ensure you have the necessary coverage for your business. Give us a call at 1-866-387-FUSE (3873) or fill out our quick and easy online quote application form now.