Learn about the Co-Insurance Clause.
Coinsurance is one of the most misunderstood terms in the insurance industry.
However it’s actually really simple when seen through examples.
The Coinsurance clause is a common aspect of many commercial property policies.
It basically provides penalties that carriers use as an incentive for policyholders to purchase coverage close to the full value of their properties.
If businesses do not get an accurate estimate of their property’s value or purchase enough coverage, they may not have enough coverage to pay for damage after a claim.
During the underwriting process, carriers use a property’s value to determine a policy’s details, such as premiums, limits and the deductible.
As a result, inaccurate property values can limit how much funding carriers have after a loss, putting them at financial risk.
Essentially, the penalties from coinsurance transfer some of this risk back onto policyholders.
In the event of a total loss, your policy wouldn’t provide you with the funds you need to rebuild your business.
Additionally, the gap between your policy’s limits and your property’s value affects the amount you get for every claim you make.
Coinsurance clauses specify a minimum amount of coverage, which is usually 80 percent of a property’s value.
If you submit a claim and an inspection finds that the amount of coverage doesn’t meet the minimum limit, insurers will reduce the claim amount paid.
It’s important to note that insurance carriers base your property’s value on the appraisal that takes place after a claim and not any figures you provide during the underwriting process.
Any estimates of your property’s value may be inaccurate or change over time, and carriers need to use a figure that’s based on the time of a loss and the specifics of your policy.
A coinsurance penalty will reduce the final payout for all property claims based on the gap between the amount of coverage purchased and the minimum limit that’s stated in the policy.
Example 1: No Coinsurance Penalty After conducting an appraisal.
An investor purchases a commercial property policy that provides $900,000 in coverage.
The policy also includes a coinsurance clause that requires coverage for at least 80 percent of the property’s value.
After a fire causes $200,000 in damage, an inspection by the carrier finds that the property’s value is actually $1 million.
However, because the policy’s limit ($900,000) is over the 80 percent minimum of the property value (in this case, $800,000), the insurance carrier pays the full $200,000 for the claim.
Example 2: Coinsurance Lowers the Payout.
The investor mentioned in the previous example purchases a property policy with the same coinsurance clause.
However, this time they don’t conduct an appraisal and only purchase $600,000 in coverage.
Because the policy doesn’t meet the required $800,000, the carrier will lower all payouts by the percentage between the amount of coverage and the coinsurance clause.
In this example, the 25 percent gap between the $600,000 of available coverage and $800,000 required by the policy would lower the $200,000 fire damage claim to $150,000.
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