Commercial building owners often purchase building insurance based on a comparison of premiums instead of focusing on the policy coverage. Commercial property insurance policies often contain clauses and exclusions that may impact recovery, if specific conditions are not met or maintained. One such condition is Coinsurance. Although it is a common element in many commercial property insurance policies, many building owners and buyers are not aware it exists or how it works. When the time comes for a claim to be filed, this can create a scenario that will not leave enough money to cover a loss. That’s why it’s so important to have the right coverage. Explore an overview of coinsurance for commercial properties, how it works, and where you can get information on the best coverage for your business.
What Is Coinsurance?
A coinsurance clause attached to your business or commercial property is a basic promise you make to adequately cover the value of the property. If you don’t uphold your end of the bargain and take a loss as a result, you or the business become what are called a co-insurer, and you have to help cover the difference.
Usually, these clauses are for between 80% and 100%, with the percentage equaling the limit on insurance that you must always carry to avoid a penalty. That means you need to have the most updated and accurate information on the total replacement cost of your building and its contents.
Calculating Appropriate Coverage
The best way to calculate how much insurance you should have is to multiply your property’s appraised replacement value by the amount of coinsurance your policy has. If you carry less than this result, your coverage in partial loss situations will be reduced.
An Overview of how Coinsurance Works
The first thing to remember: coinsurance only applies to partial loss situations, not to total loss circumstances. For example, let’s say you buy a building at a cost of $100,000, and you insure it for that amount, with a 90% coinsurance clause. When the building is appraised, it is determined that the total replacement cost is $170,000. You, however, decide to keep your policy at $100,000, so you don’t have to pay higher premiums.
Fast forward: something happens causing you to suffer a $50,000 loss to the building. The insurance company performs an appraisal and determines that based on your 90% coinsurance, you should have carried $153,000 (90% of the total loss value). As you’ll recall, you decided to maintain a policy limit of $100,000. This means that the insurance company will reduce the amount of payment accordingly. The formula they use is the amount of insurance you have, divided by the amount you should have had, with the result multiplied by the amount of loss suffered.
In the example above, this would calculate out to:
(100,000 / 153,000) * 50,000 = 32,500.
The loss payment you would receive is $32,500. Had you maintained the 90% value the coinsurance demanded, you would’ve gotten the entire $50,000 in damages.
Finding Help Understanding Coinsurance
If you’re still not certain how coinsurance works, the experienced and expert agents at Harris Insurance in Las Vegas can help. Get in touch with us for more information, help or to get started securing the right coverage for your commercial property today!