Coinsurance

"The coinsurance clause is the insurance company's way of ensuring that you provide them with the correct replacement cost estimates for the property you are insuring. If you insure your property for less than the stated percentage of replacement value a calculation is used in the event of a partial claim. For example; if you have a true replacement value of your property of $500,000 the insurance company will require that you insurance your property for a minimum of $450,000 ($500,000 X .90 = $450,000). The only time that this coinsurance clause is tested, is at the time of a partial claim. In the event of a total loss the maximum limit applies however you cannot be paid more than the property is actually worth since profiting from insurance is not allowed. Let's say that you have $500,000 in equipment, furnishings, fixtures, etc. and you elect to save a little premium and only insure your contents for $225,000. Now let's say that you had a water pipe burst inside your facility over the weekend and when you open on Monday morning, you find that you have sustained $100,000 damage to your aerobics floor, treadmills, and juice bar. Since you have $225,000 in contents coverage, you may make the assumption that you have plenty of coverage to pay for this loss. Unfortunately, the claims adjuster determines, after a careful inventory of the total replacement value of all of your business property, that you have $500,000 worth of contents. Your coinsurance clause is triggered and the adjuster tells you that you should have been insured for $450,000 to comply with the 90% coinsurance and you only insured your contents for $225,000. Since you only insured for ½ of what you were required to insure for, the claim is also settled for ½ of what you normally would have received had you been in compliance with the coinsurance limit. In other words, instead of receiving a check for $100,000 you now will receive a settlement for $50,000 less your deductible.Insure for your full replacement value and you will never have this problem. It is recommended that you insure up to 100% of your business property to protect any loss values."