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Coinsurance explained – because it is confusing!

May 8, 2015

Insurance is complicated, and often times it is quite confusing!  Insurance policies are long, wordy and have pages and pages of legalese.  Our clients rely on us to interpret that novel and tell you what it all means in layman’s terms.  One question I get asked quite a bit is to define “Coinsurance” and what it really means to the policy holder.

We most often see coinsurance in commercial insurance policies – but sometimes they do exist in personal lines policies.

In a nutshell, coinsurance is the sharing of risk between the insured and the insurer, and it’s also your promise, as a business, to insure your property at an adequate value.

You can find your coinsurance provision on the Policy Declaration Page. It’s the percentage – usually 80, 90 or 100% – listed next to the limits for building, personal property, or business interruption coverage.

Under reporting of your property value can have serious financial consequences. If you purchase a limit that’s less than the defined percentage of the replacement value of your property, the coinsurance provision will act as a penalty if you have a claim.

I know, it’s already getting confusing – so here’s an example:

  • Your business has a building and the replacement cost value is $1,000,000. Your coinsurance requirement is 80% – or $800,000 of building coverage.
  • You only purchase coverage with a limit of $700,000.
  • You suffer a loss of $200,000.
  • You have a $25,000 deductible.

In this scenario the policy would pay a claim of $175,000 less the $25,000 deductible. Your business would be responsible for $50,000 of the loss, and $25,000 of that will be the coinsurance penalty.

If your company had purchased a limit for the full $800,000 required, you would have only been responsible for the $25,000 deductible.

The coinsurance penalty is calculated by taking the purchased coverage divided by the required coverage multiplied by the loss ($700,000/$800,000 x $200,000).

Total Loss Scenario:

It’s important to note that the coinsurance will also come into play as sharing of risk in the event of a total loss. If you have purchased a limit adequate to comply with your coinsurance provision, you won’t be penalized in the event of a total loss, but in most cases you will not receive more than your policy limit less the deductible.

In the scenario above, if you have a building valued at $1,000,000, with an 80% coinsurance provision and a policy limit of $800,000, you will only receive $800,000 less the $25,000 deductible in the event that the property is a total loss.

Change in Value:

If you have had the same policy for a number of years, you should verify that the property values are adequate. These can change due to inflation and other costs, so you may be covered for less than you think.

Additionally, if you purchase expensive equipment during the policy period, you should notify your agent and make sure that cost is added to your coverage. The coinsurance provision applies to personal property, too.

If you don’t keep all your policy limits update, you may find yourself under insured – that is never more important than at the time of a loss.  Insuring your property to value is the best way  – as you will be able to rebuild without significant money out of pocket in the case of a partial or total loss.

Take a few minutes to review your policies – a quick phone call to Founders (860-482-3506) could save you some big headaches down the line!

Sora Garlasco

Commercial Lines Account Manager

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