As a business owner, managing your commercial property insurance can be complex, especially when it comes to understanding coinsurance. Often, this concept causes confusion, lots of questions, or is simply ignored altogether. To help demystify this, we’ve compiled and answered common questions to guide you through the concept of coinsurance.
What Exactly is Coinsurance?
Coinsurance is your guarantee to the insurance company that your property is properly insured to value. If your property is insured for less than the necessary amount as outlined in your policy, you may face a reduced payout in the event of a claim, called a Coinsurance Penalty.
How is Coinsurance Calculated?
Say you insure your building for $800,000 and have an 80% coinsurance clause. You are telling the insurance company that $800,000 is no less than 80% of the total amount to actually rebuild the building. In this example, you would take $800,000 / 80% and get $1,000,000. That means, in the event of a total loss, it would not take any more than $1,000,000 to fully rebuild the building.
How is a Coinsurance Penalty Calculated?
The formula for calculating a coinsurance penalty is pretty straightforward:
{Did Insure} / {Should have Insured} X {Amount of Loss} = {Amount Paid}.
If your property is underinsured, this formula determines how much of the claim will be paid out.
For example, if you did insure your building for $700,000 and you should have insured it for $800,000 and your loss was $500,000, it would look like this.
$700,000 / $800,000 X $500,000 = $437,500
Why Coinsurance Exists
Coinsurance clauses are designed to encourage property owners to insure their property to value. This helps prevent underinsurance, which can be a significant issue with commercial properties. By ensuring that properties are adequately insured, both the carrier and the client are protected from the financial repercussions of underinsured losses.
What Coinsurance Percentage Should I Use?
Determining the right percentage you should use is a crucial to avoid penalties. Often times, selecting 80%, along with an accurate appraisal, will give you a sufficient cushion to avoid a Coinsurance Penalty should the estimated value be off or change due to inflation during the policy period. A good thing to note is that the higher your coinsurance percentage (say 90% or 100%) typically lowers your annual premium because you are providing a greater guarantee.
How Should I Manage My Property Values?
It’s wise to review your property values annually. You should also do so whenever significant changes occur, such as renovations or market value fluctuations. This reassessment ensures your coverage remains in line with the property’s current value. Here are a few additional tips.
- Regular Appraisals: Keep your property’s insurance value in line with its current market value by getting regular appraisals. This helps in avoiding underinsurance.
- Understand Your Policy: Ensure that you fully understand the coinsurance clause in your policy. If in doubt, consult your insurance broker.
- Consider Alternative Coverage Options: In some cases, it might be beneficial to look into policies that don’t have coinsurance requirements.
- Review and Update Regularly: Your commercial property insurance needs may change over time. Regularly reviewing and updating your coverage can prevent coinsurance penalties.
Does Coinsurance Apply to All Types of Property Insurance Policies?
Coinsurance is common in commercial property insurance policies, but it’s not universal. Some policies may have different conditions or may not include a coinsurance clause. It’s essential to read your policy carefully or consult with your insurance agent to understand the specific terms and conditions.
Conclusion
Understanding coinsurance ensures that your business isn’t hit with an unexpected and unnecessary expense at the worst possible time. Regularly reviewing your policy, reassessing your property values, and consulting with broker can help you navigate these waters with confidence.