Coinsurance is a clause built within every property insurance policy. If you don’t carry the proper property insurance limits, this clause will cause significant headaches when trying to settle claims.
What is Coinsurance?
Coinsurance is a contractual requirement within your policy that you agree to insure your property at the correct limits, typically specified by a percentage (80%, 90%, or 100%). If, at the time of the loss, it’s determined that the insurance limits is less than the value of the property, then you become a “co-insurer” with the insurance company.
Why does the insurance company “punish” you for not carrying proper limits? It’s because most property losses are partial losses. For example, less than 2% of fire losses result in a total loss and 86% of of fire losses actually result in damages less than 20% of a building’s value. So without a proper incentive, most insureds would be inclined to purchase limits much less than their actual property values.
Let’s say you own a building worth $1,000,000. However, knowing your statistically most likely to experience only a partial loss to your property, you decide to insure the building for only $500,000 (50% of its actual value). There is a fire to the building that causes $150,000 in damage to the building. As the insurance company evaluates the claim they determine that you had only purchased insurance at 50% of the value of your building.
The insurance company would then invoke the coinsurance clause from your policy which, because you had insured the building at 50% of its value, would only pay 50% of the claim, which in this case would be $75,000. You would then be left to pay for the additional $75,000 of the claim.
ARI Brokers can help you determine the proper property limits for your company. Our expert staff will help you evaluate all of your property exposures and the determine the right limits to avoid any coinsurance penalties.