Commercial Insurance – What Is the Purpose of the Coinsurance Clause?

Commercial Insurance has a standard Coinsurance Clause all property insurance policies in the United States. The carriers require in the property insurance policy contract verbiage that when you choose coverage limits and dollar amounts that they be accurate. While there are a few exceptions the general rule of thumb is that you must insure your property to value. Although you can opt not to insure to value, you will be subject to coinsurance penalties if you choose to do so. The reason that the carriers require you to insurance to value is that the entire math (the rate promulgations) is based upon insuring to value. Failure to do so can create adverse underwriting losses for the insurance carrier.

The simple definition of coinsurance is that you need to insure to a specific value as determined in your insurance contract. Normally this amount is 80% to valuable before a penalty ensues. The coinsurance clauses deal with property insurance and not liability insurance. You can pick almost whatever amount you want for liability insurance with regards to limits. It is the property insurance whereby there are more requirements and limitations.

The simple formula for determining the coinsurance penalty is to take the amount that you did insure the property for divided by the amount you should have insured the property for times your loss. If there is a deductible on the policy than the deductible also needs to be considered within the formula. Most property insurance policies have an 80% insurance value clause for buildings and contents.

As an example, if you had a building that is worth $100,000 to replace it and you have an 80% coinsurance clause you need to insure your building for at least $80,000 or more. In our example let’s assume that you had a $10,000 building fire loss. Let us also assume that you insured the building for $40,000. So if we take what you did insure the building for, $40,000, and divide that by what you should have ensured the building four, $80,000, that will equal 50% times the loss of $10,000. So if you have a $10,000 fire claim on your building you would be paid $5,000 minus your deductible. Because you did not insurance value you are a co-insurer of the loss alongside the insurance company.

There are some policies that do not have the coinsurance clause provision. Most of the time they tend to be more expensive policies. It is important to know that why you contractually can choose almost any general liability limits that you want without penalty, you normally cannot choose any property amount unless you insure to value without suffering a coinsurance penalty. The coinsurance clause is normally not very well described on the declarations page and if you do not know what you’re looking for it can be easily missed.

If you’re looking to save money on your premiums make sure you have the proper values. This means to get as close to hundred percent of the replacement value as possible. Usually this results in lower premium rate per-hundred dollars of value on the property policy. The key for you as the insured is to know the difference between choosing a general liability limit versus choosing a property limit. The property insurance limit has ramifications if you do not insure to value.

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