Coinsurance was developed as a way to encourage policy holders to insure their property to value. Most consumers realize the majority of losses are partial in nature and would rather insure for the most frequent and likely to occur damages versus the total amount needed to replace the structure. The insurance industry’s response was to develop a way to penalize the insured at the time of loss if they didn’t carry the proper limit, or a percentage thereof, to replace the structure in the event of a total loss. It makes sense for the carrier to do so as they are exposed to a total loss and should collect adequate premiums.
Coinsurance is expressed as a percentage of 80 percent, 90 percent or 100 percent and this is an example of how it works. The proper amount of insurance to carry on your building is $100,000 and you sustain damage of $10,000 due to a covered loss. You only purchased $70,000 worth of coverage in an effort to trim costs and your policy contains a 90 percent coinsurance clause with a $1,000 deductible.
The adjustor comes out and determines you are under insured. Based on the above example, you carried $70,000, divided by what you should have carried $100,000 times your coinsurance percentage ($100,000 x .90 = $90,000), minus your deductible of $1,000. In this example your recovery is reduced from $10,000 to $6,778. Paying $3,200 of your own money for a covered loss due to simply not carrying the proper amount of insurance doesn’t make for a happy ending.
Property insurance rates are developed at 80 percent and a credit applies when 90 percent or 100 percent coinsurance is selected of 5 percent and 10 percent respectively. With that said, I would never recommend using 100 percent to value option even considering the savings because of the great potential of being under insured due to inflation and a host of other factors.
Please remember, you could meet the coinsurance clause in the policy and be OK for a partial loss but still fall short in a total loss scenario. From our example above, in a total loss you would only collect $70,000 or the policy limit on a $100,000 dollar building.
Protect yourself by trying to waive coinsurance all together if possible and if not, have a licensed appraiser value your building to confirm the limit you chose was based on the best information available at the time of purchase.
Anthony D. Smith, with Smith, Reed, Osmond LLC in Bradenton, can be reached at (941) 792-3300 or Anthony@sroinsurance.com.