Coinsurance… What you don’t know can hurt you!

Did you know that most commercial property insurance policies carry a coinsurance requirement?  If so, do you know what that requirement is?  No, we aren’t talking about your health insurance here, and we aren’t talking about carrying two insurance policies, though that can present a separate set of challenges!

Many commercial property policies come with a coinsurance clause of either 80%, 90% or 100% and if the clause exists on your policy and your not insured properly in the event of a claim, the situation may end far worse than you had expected both in your ability to recover from the loss and the out of pocket costs you may actually experience.

Let’s begin by first defining what coinsurance is:

Coinsurance Definition – A mechanism where the insurer agrees to a reduced rate if the insured carries a specific percent of insurance to the value of the property.

Essentially this means that a formula is applied on losses that occur if an insufficient amount of coverage is carried on the commercial property.  For example, lets say that you have a commercial property that has a replacement cost of $1,000,000 and your policy carries a coinsurance clause of 80%.  This clause requires you to carry at least $800,000 of coverage for your commercial property or it will be subject to coinsurance clause and thereby will result in a reduction in the amount paid at the time of a loss.  Now, you’re probably wondering just how much of a reduction and what would it look like if I didn’t carry enough insurance.

The coinsurance formula is quite simple but for those who aren’t versed in the insurance lingo or aren’t comfortable with math it can be very confusing.  For example, let’s look at a property that is insured for $600,000 and you had a $500 deductible but at the time of a loss it is determined that the property was valued at $1,000,000 and should have been insured for at least $800,000 to satisfy the 80% coinsurance clause.  The formula to determine the amount that the insurance company will actually pay is below:

Coinsurance Math

As you can see by the example above, if you insured your property for $600,000 and the insurance company determines that it should have been insured for $800,000, even though you have a loss that is less than what you insured, the resulting payment will also be less.  In this scenario, you thought you had $600,000 in insurance coverage but when you experienced the loss of $400,000 the insurance company isn’t going to provide you with a check for the full $400,000 minus your $500 deductible… instead you will end up with a check for only $299,500.. That means that you will somehow have to find a way to cover the $100,500 not covered by your insurance out of your own pocket or get a loan.  Now, you may have thought you would just have to cover the $500 deductible or whatever deductible your insurance policy carriers but now you’re forced with a much higher out of pocket cost!

Having an agent that understands how insurance works and can explain why you need certain levels of coverage and various endorsements is why you should choose your agent carefully.  You want an agent that has taken the time and invested in the knowledge it takes to write your commercial insurance policy properly.  I know insurance companies make it look like you can just buy an insurance policy off the shelf, but it really doesn’t work that way, and if you buy a policy that is not written specifically for you and your business.. chances are you won’t be covered as well as you should be.

Thank you for reading our blog, our next topic will be about endorsements and exclusions!