When most people think of Coinsurance, they automatically think medical insurance. However, business owners that have commercial property insurance coverage need to be aware of the coinsurance clause in their insurance policy. It basically requires the insured carry insurance equal to at least a specified percentage of the replacement cost or actual cash value of the insured property. The percentage, usually 80%-100%, is shown in the declarations page of your policy (sometimes it's abbreviated so look closely). If the coverage amount of insurance carried is equal to or greater than the required percentage, the insurance company will pay covered losses in full (subject to deductible) up to the limit of insurance. If the amount of insurance carried does not meet the coinsurance requirement, the insurer will pay based on the following formula:
So an example would be:
A building that has an actual cash value of $200,000 at the time of loss.
Limit of insurance on the policy is $140,000.
Coinsurance percentage: 80% ACV (actual cash value)
Amount of loss to the building from covered peril is $40,000
Deductible of $1,000
Amount of insurance required= .80 X$200,000= $160,000
Loss payment = ($140,000/$160,000 X $40,000) - $1,000
= (.875 x $40,000) - $1,000
= $35,000- $1,000
If the amount of insurance carried by the insured had been $160,000 or more, the insurance company would have paid out $39,000, the amount of loss less the deductible.
We realize Coinsurance isn't the most exciting subject to discuss or read about in a blog, but as you can see it's important for a policyholder to understand. If you have any other questions regarding this subject, or anything else pertaining to Business Insurance, in Austin, TX, please feel free to contact us today. Thanks for reading!