Category Archives: Coinsurance Clause

Helping You Understand Your Co-Insurance Clause

NYC apartmentDo you ever wonder why you are required to purchase building limits higher than you believe are necessary? If so, you are not alone. Insurance companies require you to buy building limits of insurance to satisfy the “Co-Insurance” clause in your policy.

Let us tell you more about Co-Insurance and why it’s an important part of your policy.

Co-Insurance requires that a home or business owner have a limit of insurance that is at least 80% of the total replacement cost of the property. Failing to meet this limit of insurance will result in a penalty and you would share in the loss. Here is how the penalty breaks down:

Co-Insurance Formula:

Amount Carried divided by Amount Required, multiplied by The Loss = Payment

Example #1:  80% Co-Insurance with inadequate limits:

Amount Carried: $160,000
Amount Required: $200,000
Total Replacement Cost: $250,000
Loss: $100,000
Payment: $80,000

(160,000 / 200,000) X 100,000 =$80,000 payment. (The insured did not meet the 80% required, so they are a Co-Insurer in the amount of $20,000)

Example #2: 80% co-ins with adequate limits:

Amount Carried: $200,000
Amount Required: $200,000
Total Replacement Cost: $250,000
Loss: $100,000
Payment: $100,000

($200,000 / $200,000)  X 100,000= $100,000 payment. (No co-insurance penalty applies.)

You may initially believe that committing to a conservative building limit would be a way to save money. In the long run, however, it would be unfortunate to encounter a loss and be left without adequate coverage.

If an insurance company determines you have purchased the proper limit, they will sometimes add terms to waive the co-insurance penalty. You can also ask your agent if you qualify for the “Agreed Amount Endorsement” to see if you can void the co-insurance clause.

The time to find out that you are not adequately insured is not the time of your loss. Be safe, protect your assets, and contact us for more information about your co-insurance clause.

Your Fire and Liability Policy: Deductible and Coinsurance

439D Fire BellLast week we discussed the importance of noting the policy’s “Valuation” and “Form” when determining which policy is best for you and for performing an accurate apples-to-apples comparison when you receive multiple quotes. This week, I’m going to discuss two more important items to look at when comparing various insurance quotes for fire and liability policies.

DEDUCTIBLE – Deductibles are the amount you pay when you put in a claim. Some policies only have a property deductible, some have a liability deductible, and some have both. For example, let’s say you purchase a policy with a $1,000 deductible. Later on you’re in the bathroom and your hair drier falls in the sink full of water, short-circuits, and causes a small fire with damages that total $2,800. You put in a claim with all the appropriate proof of damage and you receive a check from the insurance company for only $1,800. Why? Remember, you are responsible for your deductible, which was the missing $1,000. Obviously the lower the deductible, the more the premium will cost, but make sure you can afford that deductible when recovering from a disaster.

Imagine you have a $1,000,000 building. We’re not talking market value because market value includes land and land doesn’t ever require rebuilding. We’re talking about how much it would cost to rebuild your building exactly as it was before any disaster. You decide to insure it for $500,000 in order to save money. How smart! Or is it? Most insurance policies have what is called a “Coinsurance Clause” in order to stop people from doing exactly that. How does it work? If your policy has an 80% coinsurance clause, that means that if you insure your building for LESS than 80% of its true value, you actually become a co-insurer and you are responsible for that portion of the value you didn’t insure. Thus, a coinsurance clause penalty kicks in and you are responsible to pay the penalty. For example, imagine that one of your large trees falls on your $1,000,000 building during a storm and caves in the entire corner of the building causing $50,000 in damage. You submit a claim expecting $49,000 (Don’t forget that $1,000 deductible.). However, since you violated your coinsurance clause and only have 50% of the insurance you are supposed to have, your insurance company is only going to pay you 50% of your damages minus your deductible. In other words, 50% of $50,000 is $25,000 minus your $1,000 deductible; you are going to get a check for $24,000 to fix that $50,000 worth of damage! Coinsurance can be 80%, 90% or even 100%. Obviously the lower the coinsurance percentage required, the more expensive your policy will be. Whatever it is, make sure you don’t even get close to violating it or it’s going to cost you money in the long run.

As you can see, covering the same building can get you many different premiums by just changing the four items we have mentioned in these two blogs. You must look at the details to see WHY one quote is less expensive than another. Is it a less expensive rate or is an important coverage missing? Next week we’re going to discuss how your broker or agent fits into all these choices and what you should expect from him or her.

– Ray Alvarez