Tom's Blog
Insuring your commercial property can be an expensive proposition when you consider the total replacement cost associated with replacing your building and everything inside it. Before you decide on how to insure your commercial property, here’s what you must know about coinsurance.
The Coinsurance Clause Penalty
Every property insurance policy will have a replacement cost provision that allows the property owner to insure for less than the total replacement cost to reduce premium and at the same time allows the insurer to penalize the policyholder if the coinsurance clause has not been met. This clause is usually found in the “Conditions” section of the policy.
Depending on which insurance company is providing the coverage, the coinsurance clause is normally based on the Form the policy is written on which would be Basic Form, Broad Form or Special Form. The most popular forms used are Broad and Special, which typically carry a coinsurance requirement of 80% and 90%, respectively.
Why You Should Insure Your Commercial Property at Replacement Cost
The policy premium is reduced by insuring on a Basic Form with an 80% coinsurance clause since the property coverage limit does not have to equal 100% of the Replacement Cost. The down-side, however, would be not having enough coverage needed to repair partially damaged or replace a total loss building and contents from the ground up.
The coinsurance clause is calculated by a simple formula:
Did Have divided by Should Have minus the Deductible = Claim Payment
For example, you own a building that you believe has a value of $100,000 and using the 80% coinsurance requirement you insure it for $80,000. Three years later, you have a fire claim that amounts to $45,000 in damages and you file your claim accordingly.
The insurance adjuster determines the building’s actual value at $120,000 and then calculates the claim payment as follows:
Did Have = $80,000 (80% of $100,000)
Divided by
Should Have = $96,000 (80% of $120,000)
Equals: 83.3%
Your $45,000 claim is now reduced to $37,487 and then further reduced to $36,487 because you elected a $1,000 deductible. Ouch! Because you did not properly insure your building according to the terms of the policy (the coinsurance clause), you will be paying $8,513 out of pocket!
Obviously disappointed with the company’s claim payment, you then discover that it is your responsibility to make sure you have met the coinsurance requirement at the time of a claim and not at the time of the policy’s inception.
Knowing that the last thing your insurance company wants to do is pay claims, it is the responsibility of the insured property owner to make certain that the property is insured adequately and meets the coinsurance requirement in the policy. In addition, the coinsurance clause will apply to claims for business personal property (contents) as well.
Many commercial insurance companies today use the Special Form for property coverage and therefore require 90% coinsurance or higher. Here again, it is your responsibility to understand the requirements.
Why You Should Use an Independent Insurance Agent to Help You Insure Your Commercial Property
An independent insurance agent has access to insurance valuation software such as Marshall & Swift/Boeckh (MSB). This software will allow them to calculate the replacement cost or actual cash value of your property based on the characteristics you provide and then provide you with a detailed report. Two terms that every policyholder needs to be familiar with are Replacement Cost (new for old) and Actual Cash Value (new minus depreciation).
These coinsurance terms can sometimes be very complicated for someone without the proper background. However, the pros at Paramount Insurance Agency want you to know that you are not alone in this. We specialize in educating consumers on all matters that are insurance, and can walk you through the coinsurance process.
