Defined: Coinsurance is a penalty imposed on the insured by the insurance carrier for under reporting/declaring/insuring the value of tangible property or business income. The penalty is based on a percentage stated within the policy and the amount under reported.
Many insurance policies contain a co-insurance clause that requires the insured to carry a minimum amount of coverage on a property. The “value” of the property is determined at the time of a loss.
Helpful tips: (1.) Have an appraisal done on your property every few years (2.) Contact your insurance broker and inform them of any updates or changes to the property in a timely manner (3.) Make an appointment with your agent every year upon renewal to go over your policy – ensuring that your values are adequate and up to date
To protect yourself and your business, it is vital that the value of your properties are accurately reported and updated annually to reflect inflation costs and other such increases that may affect coverage.
The most commonly used co-insurance percentage is 80% but can be as high as 100%. (If you were to choose 100% co-insurance, this has the potential to impose the greatest penalty for under reporting.)
If your property value amount of insurance is found to be under the co-insurance percentage then a penalty is imposed, reducing the claim payment. This could be detrimental to your business if you are found to be under insured and have to pay out of pocket.
Formula used by the insurance company:
|Amount of Recovery =||Value of Loss||X||Amount of Carried InsuranceAmount of Required Insurance||– Deductible|
Let’s say you own a property that you feel will cost $100,000 to replace and the coinsurance clause in your commercial property policy has a percentage of 80%. You make the decision to insure the building for $80,000 thinking that in the event of a loss you would have fulfilled the “80%” coinsurance requirement. One day a fire loss causes $60,000 worth of damage to your property, so you make the decision to submit the claim to your insurance company. The insurance company subsequently determines that the replacement cost of the building is actually $150,000.
Using the above formula to determine how much to pay you for your claim, the insurer divides the amount of insurance you purchased ($80,000) by the amount you should have purchased (80% of $150,000 or $120,000). The result (two-thirds, or $40,000) is the amount of your claim the insurance company will pay.
If your building had been insured for at least $120,000 (80%), the insurer would have reimbursed you for the full amount of the loss.
Understanding co-insurance can be difficult and confusing. Contact the commercial insurance experts at Joy Insurance Agency to better help you understand and protect your interests.