The least understood insurance concept & biggest issue for commercial clients
What is Co-insurance and how does it work?
Co-insurance is one of the least understood and confusing concepts, yet it is present on all commercial insurance policies. Below is our quick 101 on Co-Insurance.
Co-insurance is a clause used by insurance companies on all commercial insurance policies that include property (such as buildings, contents, stock, contractor’s tools/equipment) and business interruption (such as gross rents, gross earnings, loss of profits).
This clause requires that policyholders insure their property or revenue stream (with respect to business interruption) to an appropriate value (shown as a percentage) and that the insurer receives a fair premium for the risk (whether on a replacement cost basis or an actual cash value basis – the latter being subject to depreciation).
On the insurance policy, co-insurance is expressed as a percentage. The most common clauses require policyholders to insure to 80%, 90% and 100% of the true value.
The operation of Co-insurance is best illustrated through an example and by process of its formula.
Value of Building: $1,500,000
Co-insurance Requirement: 90%
Required Minimum of Insurance: $1,350,000
Actual Amount of Insurance Carried: $900,000
Amount or Value of Loss (example: Fire): $600,000
(Actual Amount of Insurance CARRIED) X Value of Loss = Amount of Recovery
(Amount of Insurance REQUIRED)
Based on the formula and example above:
($900,000) X $600,000 = $400,000
So, the policyholder would be penalized $200,000 (Value of Loss – Amount of Recovery) based on the formula above according to the Co-insurance clause.
If you, as a policyholder choose to insure to less than the amount required by the Co-insurance clause (as stated on your policy), you are essentially agreeing to retain part of the risk (and absorb a portion of any losses) rather than transfer it to the insurance company.
You can apply the above formula to any stated coverage which carries a Co-insurance clause on your policy in order to confirm your limits and values are adequate. There’s nothing worse than finding out you’re on the wrong side of the Co-insurance calculation after a loss or claim occurs!
It’s always best to contact your insurance broker and confirm how Co-insurance is applied to your policy and how it may affect you; your broker will provide you with steps to ensure that your property and/or revenue stream is insured to a fair value.
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