There are two types of people in this world, those who are good at math and those who are not. Personally, I would fall into the “not” category. When I first started in the insurance industry and was introduced to the concept of coinsurance, I felt confused and found myself searching for clarity… Some of you might also share this feeling of confusion and find yourself asking, “What is coinsurance?”, and that is OKAY. Today we are going to take a look into all aspects of coinsurance. Where it came from, what it is for, why it matters, and how you can find out what your coinsurance obligations are. If your policy has coinsurance requirements and you like myself are a self-proclaimed math-a- phobic, do not worry, I will make this as simple and easy as possible. Let’s discuss.
Doing the Math
Coinsurance is the spreading of risk between multiple parties, it is designed to entice insureds to purchase a satisfactory amount of insurance. Typically, these parties are the insurance company and yourself. The coinsurance provision in a property policy requires the policyholder to carry a limit of insurance equal to a stated percentage of the value of the property to receive complete payment at the time of a loss. For example, a building with a value of $100,000 and a policy with an 80% coinsurance clause, should be insured for at least $80,000 to avoid a coinsurance penalty at the time of loss. Most insurance companies require 80%, 90%, or 100% for coinsurance. If there is a claim the formula to determine the recovery is based on the property’s replacement cost at the time of loss. If the replacement cost is less than the coinsurance percentage, a penalty is applied, reducing the claim payment. For example, a policyholder has $60,000 of property insurance and a fire causes $20,000 in damages. The claim is calculated by dividing the amount of insurance purchased ($60,000) by the value at the time of loss ($80,000). This factor (75%) is multiplied by the amount of the loss ($20,000 x 75% = $15,000). In this example, the policyholder would receive $15,000 (minus any deductible) for a $20,000 claim.
Which policies use Coinsurance?
Property insurance policies typically include a coinsurance clause. A building, business personal property, and inland marine policies all have a coinsurance clause. Some policies require 100% of the value to be insured, while others require less. It is important to check with your agent to know what companies offer different options for coinsurance and which options best fit your needs. What can you do to remove a coinsurance clause? The coinsurance clause included in policy terms can be “suspended” for the duration of the policy by adding an agreed value endorsement. This is a provision where the insurer and the insured agree on an amount of insurance that is satisfactory, and the coinsurance clause will not apply to a loss. To do this the insurance company will require you to submit a statement of values at the beginning of your policy term, this is a list of your insured property (buildings and personal property) that includes the value of each item. Values are expressed in Replacement Cost or Actual Cash Value (learn more about Replacement Cost and Actual Cash Value). It should be noted you will need to submit a new statement of values each year, if you choose this option.
What is best for you?
Burton & Company understands coinsurance requirements and can help review your policies to ensure that your coverage meets your needs and expectations. To find out more about coinsurance and/or its alternatives (i.e. agreed value), contact Burton & Company and we will help you through this process. If you have more questions regarding coinsurance or agreed values, find out more at BurtonandCompany.com or call today at 1-800-283-0137 to speak with a specialist.
I hope you enjoyed this post and I encourage you to please comment, follow, like, subscribe and share anything you find helpful on @BurtonandCoIns. If you have more questions and would like to speak with one of our specialists, please contact one of our Burton & Company locations. Check back soon for new and exciting content! Until next time…