Coinsurance is a term that is often included in various insurance policies, but it is commonly misunderstood by policyholders. This concept is particularly relevant in commercial property insurance policies, and it serves as a penalty that incentivizes businesses to purchase coverage close to the full value of their properties. However, if policyholders don’t accurately estimate the value of their property or purchase sufficient coverage, they may not have enough funds to pay for damages after filing a claim.
During the underwriting process, insurance carriers determine the policy’s details such as premiums, limits, and deductibles by using a property’s value. Inaccurate property values can impact the amount of funding carriers have after a loss, putting them at financial risk. Essentially, coinsurance penalties transfer some of this risk back onto policyholders. Additionally, insurers want to discourage businesses from purchasing smaller amounts of coverage, as property insurance is designed to cover extreme losses, including those that cost up to the full value of a property.
Coinsurance clauses are often included in property insurance policies that offer reimbursement based on replacement cost or actual cash value. These clauses specify a minimum amount of coverage, usually 80% of a property’s value. If the amount of coverage purchased doesn’t meet the minimum limit, insurers will reduce the claims paid.
It’s important to note that insurers base a property’s value on the appraisal that takes place after a claim and not any figures provided during the underwriting process. Any estimates of a property’s value may be inaccurate or change over time, and insurers need to use a figure based on the time of the loss and the unique policy.
Coinsurance penalties will reduce the final payout for all property claims based on the gap between the amount of coverage purchased and the minimum limit stated in the policy. For example, if a business purchases $600,000 in coverage but the policy’s minimum limit is $800,000, the insurer will lower all payouts by the percentage between the amount of coverage and the coinsurance clause. This can greatly limit a policyholder’s ability to respond to a loss, especially if an inspection finds that the property’s value is higher than initially thought.
Many businesses try to remove coinsurance clauses when negotiating with insurers as they can only hurt policyholders. Two common ways to remove them are through agreed value or value reporting. Agreed value allows the policyholder and insurer to negotiate on a set value for the property during the underwriting process, which is then used during the claims process instead of a new value determined after a loss. Value reporting involves reporting figures such as property inventories, sales figures, and operating costs to the insurer regularly, which gives them information on the property’s value.
In conclusion, coinsurance is a complicated and often misunderstood term in insurance, particularly in commercial property insurance policies. It serves as a penalty that incentivizes policyholders to purchase coverage close to the full value of their properties. Policyholders must accurately estimate the value of their property and purchase sufficient coverage to avoid unexpected reductions in their claims payouts. Additionally, policyholders may negotiate with insurers to remove coinsurance clauses through agreed value or value reporting to ensure they receive full payouts in the event of a loss.
