Coinsurance and Your Property Policy
First off, what’s coinsurance and why does it matter to you?
Coinsurance is a sneaky provision put in many property insurance policies. It’s ultimately a way for the insured and insurer to share responsibility for the risk. It can also help reduce the cost of the insurance policy premium. Coinsurance can be written on an 80/20, 90/100 or 100% rule. For example, if you have an 80% coinsurance clause on your policy, the insurance company is responsible for 80% and you, the insured, are responsible for 20%, plus deductible.
The first step is deciding if your property policy will be written on replacement cost or actual cash value. Then, you need to determine if you want the policy to have a coinsurance clause or if you want a stated value on the property. By doing stated value or an agreed limit, you avoid coinsurance all together and for a slightly higher premium, it’s worth it!
But, back to the matter at hand – coinsurance.
So, your broker decides your policy will be based on the 80% coinsurance. You’re now putting additional skin in the game outside of your deductible. You may not know this, but by purchasing the policy with the coinsurance provision, you’ve made that commitment. Let’s simplify what this means to you.
(amount of loss X limit of insurance / limits of insurance required) – deductible = loss recovery
Here's a real-life example of how this works:
If the building would’ve been insured for 80% of the replacement cost of $1,500,000, you would’ve had the property insurance at $1,200,000 and would only be responsible for your deductible. In the scenario above, the insured’s out-of-pocket is $200,000, plus deductible.
Therefore, we often recommend agreed or stated value. Typically, the benefit far outweighs the potential costs that can be incurred with the coinsurance clause. If the policy was written on an agreed or stated value for $1,000,000 and the insured had a $600,000 loss, the carrier would have paid out $600,000 minus the deductible.
Now, go dig up your insurance policies and look to see how your policy is written. It may surprise you. For more information, contact a member of the commercial real estate ‘A’ Team today.
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