Margin Clauses Making Agreed Value Options Extinct!

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Unless the insured main- tains insurance coverage with a limit of at least 90 percent on the covered property—at the time of loss—both the insured and insurer must pay a portion of the loss. In other words, the insured will be penal- ized and required to share the payment of loss with the insurer.

Capping Payments with the Margin Clause

It has been a long time developing, but purchasers of commercial property insurance have come to learn how to avoid the application of coinsurance and to maximize the benefit of this insurance with some cost savings. This is done by purchasing blanket property insurance with an agreed value provision.

When the agreed value provision or option applies, it, in essence, suspends the application of the coinsurance clause. This means that an insured can escape having to assume a penalty if the insurance limit on the covered property that sustains physical loss or damage is less than the required coinsurance percentage.

An example might be helpful here. Assume that a business owner maintains a blanket policy with an agreed value provision for its business personal property located in four different rented buildings. The value of this business personal property at each of the four loca- tions as reflected in the statement of values is $250,000. The applica- ble blanket limit is $1 million, even though the required minimum coinsurance amount is $900,000.

After a destructive fire, it is determined that the amount of insurance that should have been written for that location is $500,000. Even though the amount of insurance is 50 percent less than required, the business should still be paid in full because the owner maintained a blanket limit of $1 million.

Following the disastrous hurricane losses of recent years, insurers have discovered that many of the businesses purchasing commercial property insurance on a blanket, agreed value basis were drastically underinsured. Yet, by avoiding the application of coinsurance through...

“This means that the margin clause will now likely be issued by most insurers whenever blanket property insurance is desired.”


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