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What is 'coinsurance', and how can it affect my claim?Mar 12 '01 Write an essay on this topic.The Bottom Line Are you adequately covered? Most commercial property policies contain a coinsurance clause that may leave you holding the bill if you miscalculated your insurance needs. Coinsurance is something that you will find in every commercial property policy, and sometimes on a homeowner's form. The basic principle behind coinsurance is to make sure that the Insured (the consumer) is insuring their property to an adequate value. If the Insured is found to be carrying inadequate levels of insurance, they will be required to bear a portion of the loss themselves. Each coinsurance clause contains a level that is considered adequate by the Insurer (the company) and can be stated as a percentage (ie 50%, 80%, 90% or 100% as common) or as a stated amount (this is called a stated amount coinsurance clause ). The reason Insurers require adequate values is to ensure that there is enough premium dollars to cover a loss. If an Insured only covered a portion of their property, and a loss fell within their policy limit, the Insurer would not have collected enough premium to cover the potential loss. In reality, a total loss is rare, and it is a real temptation for an Insured to insure to the amount they feel may be affected by a loss. How Coinsurance Works Coinsurance requires an Insured to be a coinsurer in the event that the policy limits are not sufficient to the amount of insurance required. The best way to explain this is to use an example. The basic formula for determining adequacy of limits is: (Actual Amount of Insurance/Required Amount of Insurance) x Amount of Loss = Amount Insurer Will Pay Let's assume we have a building valued at $100,000. with contents valued at $150,000. The total insurable value is therefore $250,000. Under an 80% coinsurance clause, an insured would be expected to insure to 80% of his values, or $200,000. Now, let's consider two scenarios, the amount of the loss in each case is $50,000.: First, the Insured only carries $150,000. in coverage: ($150,000/$200,000) x $50,000 = $37,500. (less deductible) The Insured is forced to self-insure the shortfall of $12,500. Second, the Insured carries the full $200,000 required under his policy: ($200,000/$200,000) x $50,000 = $50,000. (less deductible) In this example, the Insured would get a full recovery under his insurance policy for the loss incurred. As you can see by the simplistic examples, coinsurance can have a major affect on what you can expect to be paid in the event of a claim. You should check your policy for any such clause, and make sure that the values you have reported on your policy are accurate. It is recommended that you have an appraisal conducted on a regular basis to ensure that property values, inflation and depreciation are taken into account in your insurance limits. Once every three years, or so, should be adequate to keep on top of your insurance needs. Although some companies will increase your limits each year for inflation, this isn't a common practice in commercial markets.  |
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