The word coinsurance may be the most misunderstood and confusing term in commercial insurance. In property insurance, coinsurance will never result in a larger payment on a claim. It can only reduce the settlement or have no impact on it.
WHAT IS COINSURANCE?
Coinsurance is a penalty imposed on the insured by the insurance carrier for under reporting/insuring the value of your property. The penalty is based on a percentage stated within the policy and the amount under reported. As an example:
WHAT IS THE COINSURANCE PENALTY?
A building has an actual replacement value of $1,000,000 and has an 80% coinsurance clause but is insured for only $500,000. Since its insured value is less than 80% of its actual replacement cost value there will be a coinsurance penalty at the time of a loss.
Lets assume a $100,000 fire loss. The simple formula for calculating the coinsurance penalty is: amount of insurance in place / Amount of insurance that should have been in place x the loss, less any deductible is the amount actually paid. In this example the coinsurance penalty would be as follows:
$500,000/ $800,000= .625 x $100,000 loss less the $5,000 deductible= $57,500 as the amount of claim actually paid by the insurance company. The coinsurance penalty in this case is $37,500 because if the building were insured to at least 80% of its actual replacement value or $800,000 there would have been no coinsurance penalty and the insured would have collected the full $100,000 loss less their $5,000 deductible.
WHAT IS THE BEST WAY TO AVOID A COINSURANCE PENALTY
In order to make sure you never run into a coinsurance penalty it is vital to make sure that all of your property is insured to the actual replacement cost. Don’t confuse replacement cost with market value. Make sure you review your property values with your agent on an annual basis.
