A lot of commercial policies have a coinsurance clause. This clause outlines a penalty when a policyholder suffers a partial loss and hasn't purchased enough limit of insurance.Insurance to valueCoinsurance in property insurance is built on the concept of insurance to value - that is, the ratio of your insurance limits to the insured property value.
For example, if you own a small office building and after consulting with a building contractor, the estimated cost of repair as a result of damage is $2 million. If your building is insured for that exact amount in your commercial property policy, the value ratio of your insurance would be 100%. However, if your building is insured for $900,000, the valuation of your insurance would be 90%.Why coinsurance?Coinsurance clauses are put in place to encourage policy to buy adequate insurance. A lot of property insurance claims involve partial losses. Without coinsurance clauses, policyholders would attempt to save money on premiums by ensuring property for a portion of its value. When this is done, these policyholders will not have the insurance coverage they need to cover large losses.
One of the major jobs of commercial property insurance is to cover against heavy losses like the complete destruction of a building used for business. For a lot of businesses, losing a building used for business will be terrible. If the building isn’t insured for its complete value, the business may not have the funds to rebuild and this could affect the company's survival.How does coinsurance work?There is a dependent penalty placed on policyholders who do not purchase the adequate insurance premium to meet the coinsurance percentage outlined in the declaration. This penalty applies to only partial losses. It is not applicable to total losses.
A coinsurance clause doesn't come into effect until you suffer a partial loss. When the loss happens, the amount of insurance you need is compared to your insurance purchase - based on the percentage listed on your policy. If the ratio is less than one, then the penalty would be in effect.
For commercial property policies, you can find the coinsurance clause in the policy conditions section. Please note, simply because your policy contains a clause like this does not imply that it is subject to coinsurance. The only time coinsurance applies is if the percentage is outlined in the policy declarations.
Example
If an "80% coinsurance" is outlined in the declaration of your commercial property policy and your building has a value of $1 million, it needs to replaced your building would have to be insured for at least 80% of 1 million ($800,000) to avoid the penalty-taking effect. If you decide to save money on the insurance premium and only insure the building for 70% ($700,000), the policy would have a $10,000 deductible.How to avoid the coinsurance clauseOne of the ways you can get around the coinsurance clause is to buy the agreed value coverage outlined in the policy from a reputable insurance firm such as Talisman Casualty In order for this coverage option to be applicable, you will have to submit a statement of value to your insurer before the policy renews or begins.
The statements would summarise the value of your insured property - this value can be expressed in terms of actual cash value, replacement cost or whichever one you select. Agreed value coverage is applicable for the duration of the policy. To extend the coverage to the next policy, you will have to submit a new statement of value before your current policy expires.
Another way to get around coinsurance clause is to use value reporting. This option is only applicable to personal property and is usually used by businesses with property values that are not stable. For example, a ski shop located in an area popularly used for winter SPORTS can use quarterly or monthly reporting. Doing this, at required intervals you will have to submit reports of your property value.Other kinds of insurance where coinsurance is applicableCoinsurance is also applicable in dental and medical insurance. A lot of dental and health policies cover dental or medical cost according to a ratio - for example 70/30 or 30/20. The larger number 70% or 80% is the percentage paid by the insurer, while the smaller number of 30% to 20% is the percentage the policyholder has to pay.
In some instances, coinsurance clauses can be found in error and omission's policies and officers and directors policy. If this is the case, you might be required to pay part of any damage settlement or award.
