Some business insurance policies include a coinsurance clause. If your policy includes a coinsurance clause, the amount of insurance you have purchased (the limit of insurance) must equal or exceed a specified percentage of the value of the insured property.
For example, if 80% coinsurance applies to your building, the limit of insurance must be at least 80% of the building’s value. If the policy limit you have selected does not meet the specified percentage, your claim payment will be reduced in proportion to the deficiency. The coinsurance percentage typically is found on the declarations page.
This is the formula for determining whether the amount of insurance you have purchased (the limit of insurance) meets your coinsurance requirement:
Value of the property x Coinsurance percentage = Minimum insurance amount required
Here are two examples of how coinsurance works based on a replacement cost value basis.
Scenario 1: Coinsurance requirement is satisfied:
The building limit is $450,000
The value of the building at the time of the loss is $500,000
The coinsurance percentage is 90%
The limit of insurance should be at least $500,000 x 90% = $450,000
Because the building limit meets the minimum amount of insurance required under the coinsurance clause, the amount due on a claim is not affected:
The cost to repair the covered damage is $100,000
The deductible is $1,000
The amount payable based on Replacement Cost Value (RCV) is $99,000
This amount payable represents 100% of the cost to repair the covered damage minus the deductible.
Scenario 2: Coinsurance requirement is not satisfied:
The building limit is only $300,000
The value of the building at the time of loss is $600,000
The coinsurance percentage is 90%
The limit of insurance should be at least $600,000 x 90% = $540,000
Because the amount of insurance purchased is only 50% of the amount required ($300,000/$600,000), coverage is afforded for only 50% of the repair cost:
The cost to repair the covered damage is $150,000
50% of the repair cost is 150,000 x .50 is $75,000
The deductible is $1,000
The amount payable based on Replacement Cost Value (RCV) is $74,000.
This means your business will be on the hook for the additional $76,000 to repair the covered damage.
The cost of materials and labor have increased dramatically in 2022. The cost of lumber alone has tripled. Make sure you are not on the hook for a huge unexpected bill in the event of a covered cause of loss by ensuring the insured value of your commercial property is adequate. The insured value of your commercial property should be evaluated at least annually.
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