What Is That Co-Insurance Clause On My Policy?
June 17, 2008 by Be Safe Insure
Filed under 1. Commercial Insurance, Property
Co-Insurance is a clause imposed on most commercial property insurance policies that requires you to insure your property up to a certain limit of insurance (usually 80%-90%, sometimes 100%). This means that if you you fail to insure your property to full value, you have become a “Co-Insurer” on your property & in the event of a claim you could be looking at a penalty.
Now we understand that if we under-insure our property, in the event of a total loss, we are short the difference. Take that same concept & apply it to a smaller loss:
Example: Actual Building Value $500,000
Building Insured for $300,000
Co-Insurance Clause 90%
Fire Loss $60,000
In this example the insurance policy states that you must be insured up to 90% of the value of the property (building) ($500,000 x 90% = $450,000). You only have the building insured for $300,000 thus leaving you under-insured by 33 1/2%.
You have a fire loss totaling $60,000. Because you were under-insured, the insurance company will reduce the amount paid on the loss by the same ratio that you are under-insured. In this case, the insurer would reduce the payment by 33 1/2% and pay you $40,000. As the “Co-Insurer” you are responsible for the remaining $20,000.
So always be aware of the co-insurance clause on your policy. My suggestion is that you pay to get appraisals done on your property every few years and ask your broker to move you to “Stated Amount Co-Insurance”. Most insurers will move you to this stated amount co-insurance in return for a copy of the appraisal and a signed Statement of Values. This binds the company to agree that there will be no penalty for under-insurance on partial losses as it proves to them that you have done your best to ensure your values are adequate.
The most important point is to remember that the onus is on you to ensure that your values are adequate. Even if you have had help from your broker or another outside source in determining the value of your property, in the event of a covered loss, the insurers are really only just taking your word for it at the end of the day. It means nothing to them if you under-insure your property, that’s why they have this clause to protect them. Who’s protecting you?
By Gabe Lanteigne
Gabe Lanteigne is a commercial property & casualty insurance broker working for Canada’s largest insurance brokerage. You can read more articles by Gabe by visiting:
http://www.canadianinsurancebroker.blogspot.com/
