Skip to main content

Coinsurance Blunder

By November 6, 2014 October 6th, 2020 Insurance

Math was not my favorite subject in school. 1+1 should always equal 2 in my opinion, but the older I got, sometimes 1+1 equaled ABC and sometimes it equaled DEF. Either way, most of the time for me it equaled IDK. Since insurance is a numbers game, I had no choice but to become good at it. There is no room for errors. So imagine my surprise when I learned that even in insurance we have math formulas.

With one click of the button an insurance agent can define or destroy your business. There are a lot of ways they could do it, but there is one major area of concern that is the backbone of every single business. I’m going to tell you those two words that can make or break you. Coinsurance clause. Those two words deal with your guarantee to insure the property to the appropriate value. If you don’t keep that guarantee and there happens to be a loss, your business then would essentially “co-insure” in the loss and the financial loss could be catastrophic. Let me explain – commercial property policies normally have a coinsurance clause of 80%, 90%, or even 100%. If your building has an 80% coinsurance clause, you must have the building insured to at least 80% of the replacement cost at the time of loss in order to avoid the coinsurance penalty. This not just for your building, there is often a coinsurance clause on your business personal property and business income, also.  It is crucial to have accurate and updated information on what the replacement cost would be for your building and contents. Take note, we are talking replacement cost (no depreciation) not the market value. Here’s an example of an 80% coinsurance clause in action.

  • Building replacement cost at the time of loss: $1,000,000
  • Amount of loss: $200,000
  • Insurance Policy Limit on Building $700,000

Minimum Amount of Building Insurance Needed: 80% X $1,000,000= $800,000

  • Percent of actual coverage due to being underinsured:  $700,000 divided by $800,000 = 88%
  • Amount of Loss that is covered:  88% x $200,000 = $176,000.

This example is based off of a partial loss. Imagine the loss that could occur if a tornado came through and destroyed everything. If you have questions regarding coinsurance, please contact us, ECI is always here.