Whether your business has significant assets, or just a one office show, you should understand how your co insurance clause works because it can mean big losses at the time of a claim. If you are under insuring your property, Co-insurance can result in costly penalties if you aren’t paying attention.
What is co-insurance? It’s a widely used method of reducing exposure to insurance companies and collecting more premium by requiring businesses to insure their property at levels very close to your actual value of property.
Here’s how it works:
Assume your business owns a building and furnishings worth $1 million. If you have an 80% Co Insurance clause on your policy, you can insure those assets for $800,000 — 80 percent of the total value without suffering too much of a penalty. Any loss of $800,000 or less will be covered in full, minus your deductible. In the event of a total loss, your coverage is limited to $800,000, minus your deductible. In a total loss scenario, you’re responsible for covering the final $200,000 not covered by your insurance.
You are co-insuring your assets by assuming the risk for covering the final $200,000 . You’re willing to do this because you calculate that a loss of more than $800,000 almost certainly won’t ever happen.
Normally, co-insurance is written with a clause of 70,80 or 90% co insurance. Unlike health insurance, the higher your co-insurance clause, the more you could pay out of pocket at the time of a claim. You want the lowest co insurance clause possible, although we still recommend you insure your belongings to value.
The arrangement of co insurance forces consumers to insure their buildings and belongings ‘to value’, or very close to it. Many consumers believe that they will never experience a total loss. Especially if you have a very large building or your business property is spread out over many locations. Insurance companies noticed that consumers weren’t insuring their buildings and property to value, so they instituted co insurance clauses that would penalize you at the time of a claim for failing to insure all of your property. A co-insurance policy requires you maintain coverage that meets the percentage of coverage you’ve agreed to. And there can be expensive penalties for failing to do so.
An example. After the insurance adjuster visits your business, it’s determined you have $200,000 in personal property. If you have an 80 percent co-insurance clause for that property, you should have been carrying at least $160,000 in coverage.
If you carry $160,000 of insurance and suffer a $20,000 loss from theft, your insurance payment would be $20,000 minus your deductible. With a $1,000 deductible that would mean an insurance payment of $19,000. You would be made fully whole, minus your deductible.
But what if you have $100,000 worth of insurance and suffer a $20,000 loss from theft? That’s enough to cover the $20,000 loss — but falls well below your co-insurance requirement. That changes things.
The adjuster would determine your claim this way: The $100,000 in coverage you have divided by the $160,000 you should have had multiplied by the amount of your loss minus the deductible. That would be $100,000 / $160,000 * $19,000 = $11,875. The $19,000 is your $20,000 minus your deductible. In this scenario, you would get $11,875 from your insurance company. Well below the loss you experienced of $20,000.
You would face the same kind of penalty under a co-insurance policy if the value of your property had increased — from growing inventory or adding expensive new equipment, for example — without increasing the size of your policy. We offer policies that adjust with seasonal fluctuations in inventory levels.
Co-insurance is widely used for commercial policies. You must pay attention. And make sure your insurance agent understands co insurance as well as any changes in your business that affect your policy.
It’s important to have an agent who understands co-insurance and that you are truthful with your agent about your business property.
Questions about your commercial-property insurance? I can help. Give me a call at 303.922.1002.