Understanding Coinsurance

Coinsurance is one of the most misunderstood concepts in commercial insurance, and one of the most important. If overlooked, it can lead to serious financial consequences at the time of a claim. Here's what business owners, CFOs, and risk managers need to know.

What is Coinsurance?

Coinsurance is a clause in many property insurance policies that requires the insured to carry a minimum amount of coverage, typically expressed as a percentage of the property's value, often 80%, 90%, or 100%.

Why It Matters

• Prevents Underinsuring: Encourages policyholders to insure property to an appropriate value.

• Impacts Claims: If you're underinsured at the time of a loss, even a partial claim can be penalized.

• Often Misunderstood: Many assume they’ll receive full payment for partial losses, without realizing the coinsurance penalty applies.

Common Pitfalls

• Outdated Property Valuations: Not updating valuations annually can trigger penalties.

• Policyholders Unaware of Clause: Coinsurance is often hidden in the fine print.

• Relying on Purchase Price: Insurance should be based on replacement cost, not market value or what you paid.

How to Avoid Penalties

• Conduct Regular Property Appraisals: Work with professionals to determine accurate replacement costs.

• Review Policies Annually: Especially after expansions, renovations, or market shifts.

• Consider Agreed Value Endorsements: These can waive the coinsurance requirement in some cases.

Example:

1. A building is valued at $1,000,000 and the policy has an 80% coinsurance clause.

2. The insured only purchases $400,000 in coverage, falling short of the required $800,000.

3. If a fire causes $200,000 in damage, the insurance company will only pay a portion of the claim, as the insured was underinsured.

4. In this case, the payout would be calculated by dividing the amount of insurance purchased by the amount that should've been purchased ($400,000 / $800,000 = 50%), then multiplying this by the amount of the loss, less any deductible. Let's assume a $2,500 deductible.

5. This results in a payout of $98,750 ($200,000 - $2,500 = $197,500 x 50%), falling well short of the $200,000 in total damages.

Bottom Line: Coinsurance isn’t just a technicality, it’s a key part of your risk strategy. Ignoring it could mean thousands (or more) lost at claim time. A quick review with your broker now can save major headaches later.

If you'd like our team to conduct a policy review, reach out today.

As always, stay covered.

Email: Noah.Jankowski@aleragroup.com