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The Coinsurance Clause – A real world example

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CoInsurance

Good news! Your company has been growing quickly. So quickly, in fact, that your assets have grown larger than your insurance coverage and you did not even realize it. So, when your company is devastated by flash flooding and you file a claim, you are shocked when only a fraction of your claim can be reimbursed. You've been struck with a coinsurance penalty from your business insurance policy.

The coinsurance clause can be found in most commercial property and business income insurance policies, and requires the insured to carry a specified percentage of insurance to the value being insured. The coinsurance penalty comes into effect when the actual value of your insured property is under-reported to the insurance company, and it can lead to substantial deductions in a settlement.

Because you expensed a great deal of new equipment but had not carried it onto the books, your insurance broker was unaware that you needed to purchase more insurance in order to stay above your coinsurance threshold. The same problem emerged with your business interruption claim as well. There had been no discussion of your recent business expansion with your insurance agent, and the actual value of your company far exceeded the insurance you purchased for it. The result: a substantially reduced business interruption settlement.

Coinsurance penalties can be easily avoided, but the steps to skirting them must be taken before a loss occurs. Communication between the policyholder and broker is crucial. The discussion should start with value determination, where it is imperative that personal property, buildings, and business interruption values are looked at from a claims perspective. Some questions to ask include:

  • What happens in the event of a loss?
  • How much will it cost to actually replace your structures and contents?
  • What is the actual cash value of the property? How does it compare to the statement of values in your policy?
  • What is the expected business interruption exposure looking forward?

A proactive approach to ascertaining the actual value of your business will help you steer clear of potential coinsurance penalties, ensuring that if the time comes, you only have to deal with one disaster.

Further Reading:
Adjusting Today "Coinsurance: What Insureds Need to Know"