There is a ridiculous amount of junk and pure "BS" in some of the polices we come across. So, we decided to pick one term we have to deal with on a daily basis (as you do, if you own any commercial property at all): the term "Co-Insurance."
Unfortunately, in the office, we often use "insider" terminology out of habit. It becomes confusing AND DANGEROUS for clients if it's not understood properly.
One of the most dangerous concepts in insurance is "co-insurance." I say dangerous because if you do not understand it, you can get burned by your own uninformed decisions.
Long ago, when insurance came to be, an interesting "battle" took place...
Insurance companies determined by taking a little bit of money (premium) from lots of people, they could afford to pay for huge losses of only a few of those people. Based on expected losses they decided how much premium to charge. And an assumption they made was that everybody would insure their property fully.
Bad Assumption! Policyholders quickly realized that most losses are small-rarely a total loss. So, instead of insuring their $500,000 building for $500,000, they insured for less - risking that they wouldn't suffer a total loss. This wrecked the insurance companies' ability to pay losses and be profitable, too.
So, the insurance companies invented "co-insurance" - which basically means: If you don't insure the full value of your property, you're going to share the partial losses.
For example (simplified for illustration purposes), if you have a building worth $1,000,000 and insure it for $800,000, you've insured 80% value. If there's a total loss, you only get $800,000 because that's the coverage limit you chose. That's NOT co-insurance. That's coverage limits.
Co-Insurance comes into play on PARTIAL losses. In this example, if you have a partial loss, say of $100,000, the insurance company will only pay $80,000...because you only insured 80% of the full value and 80% of $100,000 is $80,000. You pay the other $20,000. That's co-insurance...AND, it's in addition to your deductible.
That's a pretty compelling reason to insure to full value!
Now most policies require you to insure at least 90% of value to avoid "co-insurance penalty" at the time of loss. (But, remember your policy will never pay more than the limits of coverage. So, if you insure 90% of value and have a total loss, you're only going to get 90% of the loss from the insurance company - your policy limits).
Wait! There's one last landmine here...
To determine if a co-insurance penalty will apply, the value of your property will be determined at the time of loss - NOT what it is worth when you bought it, NOT what it was worth when you bought your policy, and NOT what you say it's worth.
The insurance company will determine the value of your property at the time the loss occurred. Why is this important?
Let's say you paid $100,000 for your building 5 years ago, and insured it for $100,000 - fully insured, no chance for a co-insurance penalty. Let's say the building is worth $120,000 today, but you didn't increase your insurance.
Now there's a partial loss, the insurance company values your building at $120,000 and says, "A co-insurance penalty applies, because your insured value of $100,000 is less than 90% of the buildings retail value of $120,000." What a nasty surprise!
There are a number of tools to prevent this. "Inflation Guard" Protection and annual reviews are two good ones. The most important thing is for you to have a basic understanding of your exposure.
Ultimately, your insurance decisions at yours. Be an educated consumer and make sure you get what you want. Give me a call if you want to discuss any of your coverage limits.
Take Care,
Jeff Leibowitz
http://www.atlanticagency.com/
(866) 272-8310
