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

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