What is a co-insurance clause and why should I care…

Most policies have a co-insurance clause, the co-insurance clause is a promise to insure your property at a construction replacement cost that is equal to or within 10%-20% of the amount needed to rebuild the structure. In other words, you need to insure your property value to the current replacement costs to avoid the co-insurance clause penalty.

WHAT IS COINSURANCE?

Coinsurance is a property insurance provision that penalizes the insured’s loss recovery if the limit of insurance purchased by the insured is not at least equal to a specified percentage (commonly 80 or 90 percent) of the value of the insured property. For example, if a building valued at $250,000 is insured with a policy containing an 80% coinsurance clause, the policyholder must purchase at least $200,000 in coverage. If the policyholder purchased less than $200,000, he or she would be responsible for a proportionate share of the loss.

What is the penalty and how is it calculated? The co-insurance penalty is a ratio of the building limit on the policy and the cost of reconstruction estimated at time of property loss. For example, if you insured your property for $175,000 , but at the time of claim the adjuster estimated replacement cost for the property is $250,000. The ratio for settlement of the claim with the co-insurance penalty would be 70% ( $175,000 Bldg Limit on Policy/ $250,000 Actual Bldg Replacement Cost), thus a claim for estimated repairs of $50,000 would be settled by the insurance company for 70% or $35,000, with a co-insurance penalty of $15,000.

You should review your policies to verify if a coinsurance clause applies and, if so, whether they have purchased the amount of insurance required to receive the full benefits they expect. To maintain the correct property replacement cost valuation you need to consider these factors: a regular appraisal, updated property values, annual inflation increase, and increased cost to rebuild due to market condition; all should be taken into account in your insurance limits.

If you would like to read more great tips, email: phillybilly01@gmail.com Bill Catanese is an insurance broker since 1990. He has trained over 15,000 agents and is an expert consultant.