What Is Coinsurance In Property Insurance? A Detailed Analysis

Property insurance incorporates coinsurance, though its mechanics differ from other policy types. Mastery of coinsurance’s operation in property insurance is crucial for guaranteeing comprehensive coverage of your assets in the event of a claim.

What is coinsurance in property insurance?

Commercial property insurance typically mandates coinsurance, necessitating policyholders to insure a specified percentage of the property’s value to ensure complete coverage for claims. Insurers often stipulate an 80% coverage requirement, though this percentage may fluctuate based on the insurer and the specific property being insured.

What is coinsurance in property insurance
In property insurance, coinsurance mandates a minimum coverage level, typically 80%, 90%, or 100% of property value, ensuring fair premiums and adequate coverage. It ensures policyholders insure to an appropriate value, maintaining fairness between insurer and insured: Image source (Insure.com)

Why do insurers require coinsurance?

Coinsurance is common in commercial property policies to prevent underinsurance. Many property damages aren’t total losses, so some owners underinsure intentionally.

Lower coverage means cheaper premiums, tempting businesses to underinsure for savings while still having partial loss coverage.

Unintentional underinsurance happens too, like using outdated appraisals that don’t reflect current values or replacement costs.

Underinsurance poses significant financial risks for insurers. Requiring coinsurance helps protect insurers and reduce their financial exposure.

How does coinsurance affect your property insurance claims?

Insurance companies penalize policyholders with a coinsurance penalty, reducing their payout for a claim if they fail to meet the coinsurance minimum.

Undervaluing the property results in a proportional decrease in coverage, regardless of whether the loss falls below the insurance limits.

Insurers calculate coverage by dividing your policy limits by the required coinsurance limits. Your payout is then diminished by the percentage difference between these amounts.

Examples:

  • Coinsurance minimum met: A business buys a $600,000 commercial property policy. Requirement: 80% coverage. Fire damages property worth $400,000. Insurer values property at $700,000. 80% coinsurance minimum met. Insurer pays full $400,000 claim.
  • Coinsurance penalty applied: Business buys $600,000 policy. 80% coinsurance required. $300,000 loss. Property valued at $1 million. Insurer applies penalty as only 60% insured. Pays $180,000 of $300,000 claim. Business covers $120,000.

Buying commercial property insurance? Appraise property accurately. Guessing leads to penalties if estimate wrong. Keep valuation updated to avoid surprises.

Can coinsurance be waived? 

Most commercial property insurance policies will include a coinsurance clause, but there are two common alternatives to coinsurance that may be relevant for some companies:

Agreed Value

Agreed value is a pre-set property value agreed upon by you and your insurer, used instead of appraising after a loss.

Negotiate it when buying a policy. Insurer uses this value for claims, avoiding coinsurance penalties. It’s valid for the policy term but needs updating upon renewal.

Value Reporting

Value reporting requires a business to regularly report the value of their current property and inventory.

This alternative to coinsurance may be ideal for businesses whose property values vary over time depending on current inventory.

For example, seasonal businesses may have much more inventory on hand during their busy season. Instead of having a coinsurance requirement, these businesses may choose value reporting.

Read more: How does Cyber insurance work?

What is 100% coinsurance in property insurance?

One hundred percent coinsurance requires you to insure 100% of the value of your property. Premium rates are generally lower for policies that require 100% coinsurance. However, there is a higher risk of the policyholder being penalized if property is not valued accurately. If the insurer assesses the value of the property after a loss and finds that it has increased in value, the policyholder would have to pay a coinsurance penalty.

Example:

  • A company purchases a commercial property insurance policy with a 100% coinsurance clause to save on premiums. The company receives an appraisal for its building at $560,000 and purchases insurance for that amount. A severe storm damages the building. The company makes a claim for $200,000 of damage. When the insurer assesses the property, it finds that its value has risen to $700,000. Because the policyholder has insured only 80% of the property’s value, it will only receive funds to cover 80% of the loss, or $160,000.

Does coinsurance apply to business income?

Yes, coinsurance applies to business income coverage. Companies must calculate their net income and operating expenses for the policy year. Deduct any non-continuing expenses when closed. To meet coinsurance minimums, they need to cover a percentage of their business income. Regularly reevaluate income estimates for accuracy due to potential growth.

Example:

  • A business calculates its yearly business income at $2 million. Its policy has a coinsurance minimum of 80%. The company purchases $1.6 million in coverage. After a fire damages the company’s building, it is forced to stop operating for two months, and the business makes a business income claim for $350,000. Because the company’s coverage meets the coinsurance minimum, the business will receive the full value of their claim.

Final Word

Understanding coinsurance in commercial property insurance is crucial when purchasing a policy. Ensure you grasp your insurer’s coinsurance requirements. By accurately valuing your property and obtaining sufficient coverage, you can ensure full coverage for any arising claims.

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