Do I Need to Know About Co-Insurance?

If you own a business and have property insurance as part of your coverage, you need to know about this clause in your policy.  Sophisticated or not errors are still made. Twenty five years in this evil and dull field and I still find intelligent businesses with incompetent help. The help is masked as professional, licensed, honest and usually classified as a friend. It never ceases to astonish me what we will tolerate but I assume it is the nature of the product. Insurance is misunderstood, boring and most businesses hate it, completely understandable. Let’s examine an actual case scenario that we saw this year.

Our client, a manufacturer with about 80 employees wants us to assist them at reducing their costs – what we do every day – nothing new here. After gathering their policy information I notice that they own two buildings but they are insured for less than $200,000 each, yet they are each over 17,000 square feet, that my friends, is not enough insurance. It gets worse. This client has a clause in their policy called a “co-insurance clause”

Co-Insurance Explained
All commercial insurance policies are subject to a co-insurance clause (unless removed) which requires insurance subject to a certain percentage of the value of the item insured. If the insurance is placed to at least the percentage of value required there is no co-insurance penalty, however, if the amount of insurance is less than required, a penalty will apply to all except the smallest of claims.
The function of co-insurance is probably best illustrated by example:

Value of Building $100,000
Co-Insurance Percentage 80%
Required Minimum Insurance $80,000
Amount of Insurance Carried $60,000
Damage Caused by Fire $25,000
Amount Paid by Insurance $60,000
80,000 x 25,000 = $18,750

This example puts in dollar terms the co-insurance concept which could be described as
“DID insure over SHOULD insure times the LOSS”.

This client’s policy not only had the co-insurance clause but had it at 100% which meant that they needed to insure the property at 100% to value. The $200,000 was not even 50% to value. The bottom line for this particular client is that they had NO COVERAGE if they had a loss using this factor. They did however pay for this every year. Yes, they paid every year to have NO COVERAGE. They probably had coverage called “the agents errors and omission insurance” but they would need to sue the agent “friend” for that coverage to take effect. Why did this client under insure? They had to have known that it was not enough coverage. They did have a responsibility to read their policy, right?

The client knew they under insured the property; they were trying to cut costs and felt that they could live with the amount of coverage they selected. What they did not know is how this penalty would affect them. Imagine having a claim and finding out you had been paying for this coverage, you thought you had, and OOPS….no coverage. Guess what? The insurance company will not return your premium for this coverage you didn’t really have. Nice, isn’t it?

Let me now tell you how easy this was to fix.  You strategically bid your insurance to the entire market place, provide the correct amount of coverage on the building – we assessed it at $3,000,000 million dollars of coverage on the buildings, eliminate the co-insurance clause all together using a business owners policy or an agreed amount clause and ……the BEST part, save the client 40% off their premiums. We gave the client coverage they never had and still saved them money – does it get any sweeter than that? Well, yes and no – our client decided that they still love their agent so …they wanted to stay with them which is part of the deal that you can have if you know how to maneuver in the commercial insurance industry.  Errors can be cleaned up and you can stay with your same agent for 40% less. Personally, our recommendation for this client was to leave the agent – he did a horrible job for this client – but in our business – our clients make the calls we just help you run a business powerfully.  Do you have a co-insurance clause in your policy?

Andrea Luoni


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