A Commercial Property uses Coinsurance

7/31/2023 (Permalink)

Coinsurance clauses are found in a wide range of insurance policies, but serve varying purposes depending on the area of insurance. When used in the context of property insurance, coinsurance is defined as "the percentage of the value of the property that a policyholder is required to insure." Coinsurance clauses are included in commercial property policies in order to ascertain that policyholders are purchasing a sufficient limit of insurance, and penalizes those who do not. If the policyholder fails to purchase an adequate amount of the value for their insured property, then their claim payment is reduced and they may not be fully covered in the event of a disaster. When this happens, the insurer compares the policy’s limit at the time of the loss against the amount required by the coinsurance percentage to calculate what will be paid out on the claim. 

Let's illustrate this in an example: Say a building is valued at $1,000,000 and the insurance policy contains an 80% coinsurance clause. This clause would specify the policyholder insures the building for $800,000. If the policyholder were to only purchase $600,000, they would be subject to penalty in the case of a property loss.  Continuing the above scenario, if only $600,000 of property limit is purchased and a fire occurs that causes $300,000 in damage repair, the claim payout would be calculated by dividing the actual insured amount ($600,000) by the required insured amount ($800,000), or 75%.  That percentage is then multiplied against the $300,000 loss, so the policyholder would only receive $225,000 minus any applicable deductible. Insuring the property at an amount less than the coinsurance clause percentage detracts from the claim payout. 

Coinsurance does not affect you until a loss is suffered, but it is essential to be aware of the inclusion of this clause when purchasing a policy as it will directly impact the coverage you receive in the event of a disaster.  

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