Many commercial property policies include a “coinsurance” clause, determining what percentage of the value of your property must be insured in order to be fully reimbursed for a loss. Your coinsurance percentage can be 80%, 90% or 100%. If you insure your business for less than that amount, your insurance company will likely impose a “coinsurance penalty” once a claim is filed. Confused? Let me give you some examples to show you how coinsurance works on a commercial property insurance policy.
You have a building you believe would cost $100,000 to replace and a coinsurance clause in your commercial property policy of 80%. You insure the building for $80,000 thinking you have fulfilled the coinsurance clause. A fire loss causes $60,000 worth of damage, so you submit a claim. The insurance company subsequently determines that the replacement cost of the building is actually $150,000.
To determine how much to pay you for your claim, the insurer divides the amount of insurance you purchased ($80,000) by the amount you should have purchased (80% of $150,000 or $120,000). The result (two-thirds, or $40,000) is the amount of your claim the insurance company will pay.
If the building had been insured for at least $120,000, the insurer would have reimbursed you for the full amount of the loss.
If your commercial property policy has a 90% coinsurance clause and, if at the time of a loss, the insurance company determines your building is worth $500,000, you would have needed to have insured the building for $450,000 to avoid the coinsurance penalty.
If you have the building insured for $270,000 and a fire loss causes $100,000 worth of damage, the insurance company would apply the coinsurance penalty. They would divide the amount of insurance you purchased ($270,000) by the amount you should have purchased (90% of $500,000 or $450,000). The result (60% or $60,000) is the amount of money the insurance company would pay on your claim less the deductible. The penalty in this example is $40,000
If the building had been insured for $450,000 the insurance company would have reimbursed you for the full amount of the loss less the deductible.
Still sound confusing? I can assist you by explaining the different coinsurance options to help you maintain adequate levels of insurance coverage. For more information about commercial property insurance and coinsurance penalties, email me at TKrider@InnerHarbourFLA.com or call me at (850) 837-3629.