At Burton & Company, we encourage experiences! We step outside the box, engage our clients and ask questions to discover what matters most to them. So they know we have their backs. As an insurance agent, a large part of the profession is fielding and asking questions. Without a doubt, the question I hear most often is, “Why are my Costs So High?” This is a legitimate question and certainly one that is very important. Especially today when the simple fact is how and where we spend our money is at a premium. That choice can make the difference in paying the bills, planning for our financial futures, providing for our families and living the lives we dream of having. So, I have decided to dedicate myself to seeking out these elusive answers to what I know are complex questions. Over the coming months, I will be exploring different industries and lines of insurance to understand what the reasons are for these costs and what are the things that matter to you. My goal is to provide insurance insights to your questions and locate the resources you need to help you be successful. I look forward to this journey and ask you to please comment, follow, like, subscribe and share.
There are two types of people in this world, those who are good at math and those who are not. (I am not a math person, period end of story.) When I first started in the insurance industry and came across the concept of coinsurance I was slightly confused, complexed, confounded, befuddled, puzzled… you get the idea. I know some of you might be feeling this way or saying to yourself, “What is coinsurance?” and that is great because today we are discussing coinsurance and all its aspects! 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) In case you are math-a- phobic (like myself) don’t 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% 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 others require less (it is important to check with your agent to know what companies offer different options for coinsurance to best fit your needs). What can you do to remove a coinsurance clause? The coinsurance clause included in the policy language can be “suspended” for the term of the policy by adding an agreed value endorsement. This is a provision where the insurer and the insured agree that the amount of insurance is suitable 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 simply 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 you review your policies to ensure your coverage meets your expectations. To find out more about coinsurance or its alternatives (like agreed value) and the processes involved (completing forms for a statement of values or general applications) 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 and call today at 1-800-283-0137 to speak with a specialist.
I hope you enjoyed this post and encourage you to please comment, follow, like, subscribe and share anything you find helpful on @BurtonandCoIns If you have more questions or would like to speak with one of our specialists, please contact one of our Burton & Company locations. Check back soon for newer and exciting content! Until next time…