Risk & Business Magazine Spectrum Insurance Magazine - Spring 2019 | Page 28

COINSURANCE
UNDERSTANDING
COMMERCIAL
PROPERTY
COINSURANCE
BY: HUGH HUGHES
INSURANCE ADVISOR
SPECTRUM INSURANCE
C
oinsurance is one of the
most complicated and
misunderstood terms in
insurance. This concept is
commonly included in a
number of different policies, including
property, health, and directors and
officers. However, coinsurance works
differently for each type of coverage, and
businesses that don’t understand how it
applies to property insurance may find
their claims lowered unexpectedly.
Coinsurance is a common aspect of
many commercial property policies.
These clauses are essentially penalties
that carriers use as an incentive for
policyholders to purchase coverage
close to the full value of their properties.
And, if businesses don’t get an accurate
estimate of their property’s value or
purchase enough coverage, they may not
have enough funds to pay for damage
after any type claim.
WHY PENALIZE POLICYHOLDERS?
You can think of coinsurance as a type
of smaller insurance coverage that’s
included in your policy, but carriers are
the ones that are protected.
During the underwriting process,
insurance carriers use a property’s value
to determine your policy’s details, such
as premiums, limits, and the deductible.
28
As a result, inaccurate property values
can change how much funding carriers
have after a loss, putting them at
financial risk. Essentially, the penalties
from coinsurance transfer some of this
risk back to policyholders.
Insurance carriers also want to discourage
businesses from buying smaller amounts
of coverage. Property insurance is
generally intended to cover extreme losses,
including those that cost up to the full
value of a property. However, most losses
are relatively minor when compared to
the total destruction of a building. For
example, a small fire at your business may
require high clean-up and repair costs
but not nearly as much as the complete
collapse of the entire structure.
It may be tempting to save on premiums
by only purchasing coverage for these
smaller claims, but this puts your business
at significant risk. In the event of a total
loss, your policy wouldn’t provide you
with the funds you need to rebuild your
business. Additionally, the gap between
your policy’s limits and your property’s
value affects the amount you get for every
claim you make.
cost (the funds needed to reconstruct or
repair a building with similar materials)
or actual cash value (the replacement cost,
minus any depreciation). These clauses
specify a minimum amount of coverage—
usually 80 percent of a property’s value.
If you submit a claim and an inspection
finds that the amount of coverage doesn’t
meet the minimum limit, insurers will
reduce the claims paid.
It’s important to note that insurance
carriers base your property’s value on the
appraisal that takes place after a claim
and not on any figures you provide during
the underwriting process. Any estimates
of your property’s value may be inaccurate
or change over time, and insurance
carriers need to use a figure that is based
on the time of a loss and your unique
policy.
A coinsurance penalty will reduce the final
payout for all property claims based on
the gap between the amount of coverage
purchased and the minimum limit
that’s stated in the policy. Here are some
examples that show how coinsurance can
affect your property insurance claims:
CALCULATING PENALTIES EXAMPLE 1: NO COINSURANCE
PENALTY
Coinsurance clauses are included in many
property insurance policies that offer
reimbursement based on a replacement After conducting an appraisal, a business
purchases a commercial property policy
that provides $900,000 in coverage. The