Property Insurance: What is Coinsurance?

May 25th, 2021 by admin

Coinsurance is included in many insurance policies, including health, directors and officers, homeowners, commercial, and property, the last of which we are covering here. While there may be a “coinsurance” clause in each of these types of insurance policy, the use and effect may be unique to each. 

Property Insurance What is Coinsurance

When it comes to property insurance, sometimes, business owners set up their new property insurance policy without reading the fine print. When buying or building a new business, insurance is one of the most important aspects that some may try to save money on. For this reason, insurers have implemented a provision known as coinsurance. 

Below we will dive further into coinsurance and why it is essential.

What is property insurance coinsurance?

The definition of coinsurance includes a provision within a property insurance policy to deter business owners from underinsuring their properties. It encourages business owners to carry a reasonable amount of coverage in relation to their property’s value. 

The coinsurance provision was set to ensure that a minimum percentage of the business’s value is covered. Insurers often require a minimum of 80% coinsurance up to 100%. The exact percentage may vary from policy to policy.

Why is property coinsurance important?

Commercial properties may experience damages or loss, but it is often not a total loss. Many business owners opt for an insurance policy less than the property’s actual value due to lower premiums.

Although, if there is damage to the property and a claim is filed, they will not recoup the actual cash amount needed to cover repairs.  The insured could end up paying several thousand dollars out of pocket. Coinsurance is important to look out for the insurance company and the business owner as well.

Coinsurance is important to ensure you have adequate coverage of your business and to encourage property assessment values to be accurately assessed. Having your property professionally appraised may cost you a bit of money now but will save you hundreds of thousands in the long run.

The very nature of coinsurance is to reward those who choose to insure their property at as close to full value as possible and penalize those who don’t. It’s a way to create equality. 

How does coinsurance work on property insurance?

Whether intentional or not, businesses often see an underinsured property as a way to save money, but they are more likely to lose money should they need to file a claim for replacement cost. Coinsurance is automatically set in place within your policy, ranging from 80% to 100%. However, coinsurance can be waived if a value amount of the business is agreed upon by both the insurer and business owner. That’s referred to as “insuring to full replacement value.”

An insurance policy with 90% to 100% coinsurance may come with lower premiums. Still, if you underestimate the value of your building, you are not guaranteed to be paid for the total amount for needed repairs.

It is important to remember that the limit of insurance within the coinsurance calculation is the property’s value at the time of the claim, not when the policy was initiated. If you provide updates to your business throughout the year, your insurance policy will reflect the current value.

Contacting your agent or broker at renewal time in order to conduct a replacement cost calculation of your building or business property is recommended.

Example of commercial property coinsurance

  • Coinsurance minimum met. A commercial property holds an insurance policy of $500,000. The coinsurance provision requires a minimum of 80% of the value to be insured. A hurricane blows through, causing $300,000 in damages. The insurer inspects the property and values it at $600,000, meaning the full $300,000 would be paid by the insurance company.
  • Coinsurance minimum not met. A commercial property holds an insurance policy of $500,000. The coinsurance provision requires a minimum of 80% of the value to be insured. The business suffers damages totaling $250,000. The insurer inspects the property, valuing it at $1,000,000. Because the business owner has underinsured the property by 50%, the insurance company will only pay 50% of the claim. In doing so, this leaves the owner to pay $125,000.

How is property coinsurance calculated?

The coinsurance formula can be challenging to understand for those not well-versed in the insurance jargon. To start, divide the actual amount of coverage of the property by the amount that should be carried (whether that be 80 coinsurance, 90 coinsurance, or 100 coinsurance of the value). Next, multiply the amount of the loss to get the reimbursement value.

The formula reads {actual amount of coverage} / {amount that should be carried} X {the amount of loss} = reimbursement value.

Coinsurance is an important factor to consider and not overlook when setting up your property and casualty insurance policy. Insuring your property fully is recommended by almost all insurance companies for their sake and yours. There are policies available that waive the coinsurance clause.  Ask your agent or broker if a policy like that is available to you.  It may cost you more in premiums but a lot less of a headache if you have a claim.

Contact Insurance Center of North Jersey for all of your business insurance needs, including deciding on the amount of property coinsurance that would be best for you.