Don’t Get Caught Paying Your Own Claim

I just taught a Commercial Property Class to a group of agents here in Seattle last week for the Certified Insurance Service Representative (CISR) program. One of the concepts that is most difficult to grasp, even for agents, is coinsurance. If you are a business owner, it will pay for you to understand coinsurance, or else you may pay dearly not to!

Ask your insurance agent or broker to confirm what coinsurance percentage you have for your property insurance. If you have coinsurance (some policies waive it), it will come in either an 80% or 90% figure. That means that if you have a partial loss on your building or property, you must be insured for at least that percentage of your total property value at the time the loss happened, or else you become a coinsurer of your claim. Sound confusing? It can be. Let’s take a look at an example:

You own a commercial property valued at $500,000. You’re insuring it for $250,000 with a 80% coinsurance clause. Why is it only insured at $250,000? Well, that’s where it normally is but today you received extra inventory that will be flying out of your warehouse tomorrow. That is until disaster strikes!

You suffer a fire loss of $50,000 but you’re not worried because you have more than enough coverage, right? Wrong. The adjustor comes in to settle your claim and tells you that you were underinsured for coinsurance. Here’s why.

You did insure your property at $250,000, but you should have insured it for $400,000 (80% of your actual value at the time of the fire). The adjustor divides the “did by the should”, or the $250K by $400K and comes up with 63%. He then multiplies that percentage by your loss of $50K which is $31,250. That’s all your insurance company is going to pay YOU! How does that make you feel? Not only have you had a fire damage your property and set your operations back, now you have to foot the additional costs by nearly $20,000!

Coinsurance is a highly misunderstood concept and difficult to explain. The bottom line is that you need to make sure you are adequately protected or else you can become a partner in paying your claim.

Dan

To understand coinsurance more, take a look at my booklet, Eight Really Cool Rules to Better Insurance Buying. It explains coinsurance and much more. It will be a valuable tool in making sure you are getting the right coverage at the right price!