Co-Insurance: When Your Insurance Won’t Pay

Do You Know How Much Your Insurance Policy Will Not Pay?

Learning About When Co-Insurance Kicks In for You

When reviewing your property insurance, there are few subjects more difficult to understand than the co-insurance requirements. Still they are found in virtually every insurance policy providing property insurance coverage. A universal premise of property insurance is the obligation to insure to value – that is, the worth of what is being insured.

If an insurance company determines that property involved in a loss is under insured, a penalty will likely be applied. Therefore, some believe the purpose of co-insurance is to punish the client in the event of a loss; however its simple intent is to ensure that adequate premiums are collected in order to pay for actual losses when they arise.

WARNING – there is a penalty for under insuring property values that could be deducted from your claim payment.

Many businesses have not kept asset values current in these days of uncertain costs and rapid inflationary factors. Accurate appraisals and thoughtful insurance coverage arranged by experts are critical.

How is this penalty determined?

The co-insurance penalty is directly linked to the percentage that property is under-insured. If the policy of insurance requires property to be insured to a replacement value of $1,000,000 but instead reflects a limit of only $750,000, the insured will then become self-insured to the extent of 25% of any loss; and further, the deductible is then deducted from this amount. In the event of a large loss, such a penalty can be significant, even financially crippling.

Is there an allowance for discrepancies and property value shifts?

Insurance companies generally allow a small concession for underinsurance, protecting clients from property value increases during the term of the policy. For most property policies, the requirement is to insure to a minimum of 80% or 90% of the asset value to avoid a co-insurance penalty.

As long as your asset is at least insured to this percentage, a co-insurance penalty will not be applied.

However, it is important to note that the most your policy will pay is the limit of insurance stated in the policy itself. So, even though values carried may not be subject to a co-insurance penalty due to an 80% or 90% clause, there may still be insufficient limits to pay the full amount of the loss. Blanket Coverage and Margin clauses applied to property policies will give further protection in these circumstances.

How are ‘values’ determined?

Most insurance policies covering buildings and contents provide replacement value to repair or replace damaged property to the new and current ‘today’ value. That means that there is no reduction in the claim settlement for depreciation, utility or market value. Replacement Cost Value is the value that you must insure to in order to avoid a co-insurance penalty.

One exception to this is the Mobile Equipment or All Risks Floater policy. These policy forms cover contractor’s equipment and generally will pay claims only up to current market or depreciated value.

3 Tips to Avoid Co-Insurance by Ensuring You are Insured to Full Value

  1. Have professional appraisals done regularly to ensure your assets are valued at Replacement Cost, excluding land values
  2. Apply an inflationary percentage increase each policy renewal to account for economic and market increases in value
  3. Speak with a building contractor familiar with your building type. Contractors generally know the current cost per square foot to rebuild commercial buildings. Apply this factor to your square footage for an indication of current value to rebuild. Remember this would only be an indication and should not replace a professional appraisal

And don’t forget, we are happy to help. Reach out to speak with one of our licensed insurance brokers today. We are happy to help you validate this and other aspects of your commercial insurance program.