A common property insurance mis-conception is that you as a policy holder can determine the limit in which you WANT to insure your building or contents. Many people look around their office and say, “if the place burned down, I’d only want to cover the computers and electronics… those would be roughly $5,000… let’s put $5,000 as my property limit to keep the cost down.”. That is not the way that property insurance works in most cases.
Insurance companies require for you to insure up to a percentage of the value of all of the property and contents. The most common co-insurances are between 80%-100%. The lower the co-insurance the better, you will have a higher margin of error and incur a lower penalty if you undervalue your property.
For example, a building with a value of $100,000 and a policy with a coinsurance of 80% must be insured for $80,000. If the insured amount is found to be under the coinsurance percentage at the time of a loss, then a penalty is applied which will reduce the amount of the claim payment. This situation could be detrimental when it comes to replacing or repairing your property.
Calculating the Penalty
The penalty percentage is calculated by the amount that the building was underinsured. Let’s review an example with the following values:
Building Replacement Cost Value: $100,000
Building Insured Value: $60,000
Value of Property Damage Claim: $20,000
Policy Co-Insurance: 80%
For this example, if an organization owns a building $100,000 building, the least they could insure it for is $80,000. However in this example the building was insured for $60,000. Then a property claim occurred which resulted in $20,000 of damage.
To calculate the penalty factor the insurance company will divide the limit on the policy ($60,000) by the limit the building should have been valued at ($80,000). For this example the difference is 75%. This amount is then multiplied by the amount of the loss as follows:
$20,000 x .75 = $15,000
The policy holder will receive $15,000 (less the deductible) for the $20,000 claim. These numbers become more alarming as the margins increase.
Coinsurance will never overpay on a claim. It will only reduce the payment or have no impact at all. Ask your insurance broker what your co-insurance is and how to reduce or eliminate it. Charity One Insurance Agency has insurance consultants standing by to answer your nonprofit insurance and social service insurance concerns. Call us at 626-815-1550.