Coinsurance can be a tricky thing, and it’s hard for many people to understand exactly what it means. But since a coinsurance clause can be found on just about any type of commercial property insurance policy, it’s definitely important to know how it can affect your coverage.
What’s the purpose of coinsurance in property insurance?
Basically, the coinsurance clause is listed on your policy because the insurance company wants to ensure that you have enough skin in the game so to speak. They want to encourage you to ensure the property for at least a percentage of it’s replacement cost (usually 80%, 90% or 100%), and if you choose to underinsure, they will penalize you by making you share the losses.
This is because the insurance companies know that partial losses are more likely to occur than total losses, and without this requirement, many people would only insure for partial losses in order to get a lower premium.
Of course, this wouldn’t fare well for those looking for full coverage, which leads us to the concept of equity rating: all who are insured with the same relevant risks should be charged the same corresponding amount.
What exactly does an 80% or 90% coinsurance mean?
Coinsurance is typically set at 80% or 90% of the building’s replacement cost or actual cash value. This means if you have a building with a replacement cost value of $100,000 and an 80% coinsurance factor then you would only have to ensure it for $80,000 in order to avoid a penalty and get full recovery.
Now let’s say that you only insured this same $100,000 building for $75,000, and it catches fire and burns to the ground. In order to figure out the penalty, your insurance carrier will divide how much insurance you had by how much you were supposed to get and multiply that by the damage. Since this was a full loss, this puts your coinsurance penalty at $25,000 (what you’ll have to pay out of pocket for the damages) since you underinsured it from the very beginning.
Here are a few ways around coinsurance
There are a couple of ways to bypass the coinsurance clause. They are:
- -Adding an agreed value provision. This simply means that if you and the insurance carrier can agree on the amount of insurance needed, you can have the coinsurance clause removed.
- -There are a couple of other options you may want to discuss with your insurance agent like purchasing the property on a value reporting basis, getting replacement cost coverage or having inflation guard protection.
In the instance that a full or partial loss does occur, what matters is that your property is sufficiently covered, and you don’t have to come out of pocket for a hefty penalty that could’ve been avoided.
This all starts with truly understanding coinsurance and how it affects your property insurance coverage. If you have questions about coinsurance, it’s important to contact your agent as soon as possible to make sure you have the coverage that you think you have in place.
Contact Thompson Insurance in Birmingham and Montgomery, AL, for More Information on Property Coinsurance
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