Coinsurance
What Insureds Need to Know About Coinsurance
Company XYZ had been growing rapidly. Company officials believed they had comprehensive insurance coverage, but they were unaware that their insurance policy contained a coinsurance clause. When a substantial loss took place, they were only able to recover a small part of their property and business interruption claims, as a result of a coinsurance penalty. The problem: understated values, far too low to meet the policy's coinsurance requirements.
Had the broker known that the insured had expensed a great deal of equipment and not carried it on the books, more insurance would have been purchased to be in line with the true values; thereby avoiding a coinsurance penalty.
In the US insurance market, coinsurance is the joint assumption of risk between the insurer and the insured. In title insurance it also means the sharing of risks between two or more title insurance companies. Wikipedia
A similar problem affected the business interruption claim because the insured did not discuss the recent expansion of the business when placing the coverage. Again the coinsurance requirement was not met and the business interruption claim was substantially reduced.
The time to avoid a potential coinsurance penalty is before the loss occurs. That means both the broker and client must communicate up front. When values are determined they should be viewed from a claims perspective. Ask questions like: What would happen in the event of a loss? What would the actual replacement cost of the structure and the contents be? How about the actual cash value of the property and how does it compare to the statement of values? What is the expected business interruption exposure looking forward?
A proactive approach to ascertaining correct values will help reduce a potential coinsurance penalty. There’s no better way to ensure that reported values will be in line with the actual values at the time of any disaster.
If you have received a small recovery due to a Coinsurance penalty, call our public adjusters.
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Adjusting Today is provided free of charge as a public service by Adjusters International, Inc., disaster recovery consultants. It is provided for general information and is not intended to replace professional insurance, legal and/or financial advice for specific cases.
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