Property Co-insurance (not Healthcare Co-insurance)
Most people associate ‘co-insurance’ with health insurance.
In property insurance it’s very different, and if you don’t have a good understanding of property ‘co-insurance’, you could be penalized on a claim.
This infographic illustrates a co-insurance penalty…
If property owner has 90% co-insurance on his policy. That means he/she needs to insure at least 90% of the building’s replacement value to receive full-benefit from a claim payout.
It’s very important to understand that replacement value is NOT the market appraisal.
In the insurance world, replacement cost value is defined as ‘the cost to reconstruct the current building with similar quality parts or materials’. Replacement cost value is most often calculated by using a replacement-cost estimator (Marshall-Swift, etc).
Co-insurance claim example
A property owner has 90% co-insurance on his policy. The building’s replacement value is correctly estimated at $5,000,000, so the property owner needs to insure the building for at least $4,500,000 (90% of $5m)
But he wants to save money and decides to insure the building for $3,375,000.
Several months later there’s a fire and, after the deductible, it costs $300,000 to repair the damages.
Co-insurance Penalty on the Claim
Because the owner insured the property for 3/4 of co-insurance, the policyholder will incur ‘co-insurance penalty’, and only receive ¾ of a claim payout.
The loss should have paid out $300,000, but the owner actually only received $225,000. He loses $75,000 due to his negligence of property co-insurance.
The Bottom Line
If your policy has ‘co-insurance’ wording, make sure you have your buildings sufficiently insured. It may cost a little more, but it could save you from disaster down the road.
Understanding Co-insurance is crucial for accurate coverage, but it doesn’t help you lower the premium.