Ask yourself these questions: When was the last time you looked at your commercial insurance policy? You may be surprised to discover that many commercial policies include coinsurance provisions on their Building and Business Personal Property coverages.
What is coinsurance?
Coinsurance is a property insurance provision that imposes a penalty on an insured’s loss recovery if the limit of insurance purchased is not at least equal to a specified percentage of the value of the insured building or business personal property.
In other words, coinsurance penalties are triggered when a policyholder has not purchased enough insurance to cover a required amount of the value of their insured property.
This means that if adequate coverage is not purchased for the company’s building(s) and business personal property, the insured will be subjected to a coinsurance penalty should a covered loss occur at the property.
What are the benefits of coinsurance?
Coinsurance allows a company to lower the cost of their insurance policy premium based on the amount of risk that the owners want to absorb if a loss occurs. The lower the coinsurance percentage, the lower the policy’s price. Without the option for coinsurance, a small company may not be able to afford the coverage required to get their business off the ground.
The biggest mistake many policyholders make is purchasing a policy without having a full understanding of what coinsurance is and how it should be used. In many cases they are never even aware that their policy includes this clause.
If the amount of coverage purchased is less than the required amount, the policyholder will be penalized with a coinsurance penalty or reduction in collectible loss. Remember to read the policy’s Declarations page, which should show all coverage limit amounts and any applicable deductibles for both the business’ buildings and their business personal property.
Beware of issues with coinsurance
In some cases, coinsurance provisions can cause major problems for policyholders. When a business policy with a coinsurance clause suffers a significant partial loss to their property, if they don’t have the correct amount of coverage as compared to their coinsurance percentage selection (which could be anywhere from 50% to the more common 80%, 90% or 100%), then they will face a financial penalty that will reduce the insurance settlement amount.
Example: Company A has a $500,000 partial building loss. Company A purchased a policy with a 100% coinsurance provision. They should insure their building at $2,000,000, but only purchased coverage of $1,000,000.
Because of the coinsurance provision in their policy, they are now facing a 50% coinsurance penalty on the loss, as the calculation displays below:
$500,000 loss – $5,000 deductible x ($1,000,000 purchased coverage/$2,000,000 required coverage) = $247,500 loss paid
The remaining $255,000 loss amount will now have to be paid directly by Company A, out of pocket!
Coinsurance provisions can add an additional level of complexity to settling a property claim. Once a loss occurs that involves a coinsurance provision, hiring a public adjuster as your advocate may avoid or lessen the effect of a possible coinsurance penalty.
Have questions about your property insurance claim? Feel free to contact Stark Loss for more information about how a Public Adjuster can help.