Risk & Business Magazine Spectrum Insurance Magazine - Spring 2019 | Page 29

COINSURANCE
policy also includes a coinsurance clause
that requires coverage for at least 80
percent of the property’s value. After a fire
causes $200,000 in damage, an inspection
by the insurer finds that the property’s
value is actually $1 million. However,
because the policy’s limit ($900,000) is
over the 80 percent minimum of the
property value (in this case, $800,000),
the insurer pays the full $200,000 for the
claim.
EXAMPLE 2: COINSURANCE LOWERS
THE PAYOUT
The business mentioned in the previous
example purchases a property policy with
the same coinsurance clause. However,
this time they don’t conduct an appraisal
and only obtain $600,000 in coverage.
Because the policy doesn’t meet the
required coverage amount of $800,000,
the insurer will lower all payouts by the
percentage of the gap between the amount
of coverage and the coinsurance clause. In
this example, the 25 percent gap between
the $600,000 of available coverage and
$800,000 required by the policy ($800,000
- $600,000 / $800,000 = 25 percent) would
lower the $200,000 fire damage claim to
$150,000.
"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."
REMOVING COINSURANCE CLAUSES
Because coinsurance clauses can only
hurt policyholders, many businesses try
to remove them when negotiating with
carriers. There are two common ways to
do this:
Agreed value—During the underwriting
process, you and the insurer can negotiate
on a set value for your property. This
figure is then used during the claims
process instead of a new value that’s
determined after a loss. However, the
agreed value only applies to the policy’s
term, and you need to update this figure
when renewing a policy.
Value reporting—You can report figures
such as a property’s inventories, sales
figures, and operating costs to your
insurer on a regular basis. These reports
will give the insurer information on the
property’s value and are especially useful
for businesses that operate seasonally.
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