...paying $25,000 of the loss out of its own pocket, so to speak. Had the hotel met the coinsurance requirement of 80 percent by insuring in the amount of $800,000, there would not have been a penalty and the insured would have recovered the full $100,000 less the deductible.
Some insurance policies do not contain a coinsurance provision, and in those policies that contain the provision, coinsurance can be waived or suspended by the use of an agreed value endorsement. With this endorsement, an insured can avoid a coinsurance penalty. However, the coinsurance provision is suspended only if the insured carries an amount of insurance that the company and insured agree to be the property’s actual value. With this endorsement, the insured and insurer have agreed prior to loss that the amount of insurance carried is adequate. It is important that an accurate insurance amount is established for this endorsement to be effective.
Insuring the hotel building for an amount that accurately reflects its value can reduce or eliminate the risk of underinsurance. Hotel management can benefit from regularly discussing their insurance program with their agent or broker, particularly focusing on whether they carry sufficient insurance so as to eliminate a coinsurance penalty in the event of loss. Hotels may also be eligible to purchase an agreed value endorsement, suspending the coinsurance provision, and that possibility should be discussed as well.