What does the term “coinsurance” mean when referring to commercial property insurance? This word is often misunderstood and confusing to policyholders. It is a term that is completely different when it comes to health insurance, and it is important to know the meaning and how it works when you insure your building for your business.
Coinsurance is commonly found in commercial property policies, but it is also found in many other insurance policies such as dwelling forms, homeowners, federal flood, directors and officers liability, inland marine, and of course health insurance. Even the use of the word “coinsurance” can have many different meanings from one type of policy to the next.
Property coinsurance is the percentage of the property value that the policyholder is required to insure. It can apply to both buildings and contents. For example, if you have a building with the value of $1,000,000 and a policy with an 80% coinsurance clause, you will need to carry at least $800,000 in building coverage, or a monetary penalty will apply if there is a loss to the building. This is where the math comes in! If you, as the policyholder, do not insure to the 80% and you suffer a loss, then the insurance carrier will only pay the percentage of what is insured for the loss (minus the deductible, of course). An example would be, if you had purchased $600,000 of insurance, which is 75% of the $800,000 required, then the carrier would pay 75% of the loss amount (minus the deductible), therefore resulting in a monetary penalty. Imagine the hardship a policyholder would go through after a large loss and only receiving 75% of the loss amount! That could result in something as tragic as closing down a business and going bankrupt. This makes it extremely important that you work with your insurance agent to be sure your property is correctly insured to value.
The most common coinsurance clause amount is 80%, although sometimes it may be 70%, 90%, or 100%. Often, you can find examples listed in your policy as to how coinsurance works for you. The Insurance Services Office (ISO) commercial property and business income forms include those examples. The rates may differ by carrier, and although coinsurance may have zero impact on a claim, it does have the potential to reduce a settlement on a claim to the policyholder’s disadvantage.
If you have questions about coinsurance or your property being insured correctly to value, contact your insurance agent today.