Misunderstood Property Ins. Issues (Part 1)

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Coinsurance on buildings and personal property

Coinsurance assists in establishing a rate per $100 of the established insurance limit. For commercial property for building and personal property, the coinsurance rates are at 80%, 90%, and 100%. For commercial property for business income, the rates are at 0%, 50%, 60%, 70%, 80%, 90%, 100%, and even 125%.

Coinsurance allows the insured to insure to a minimum coinsurance. For example, $100,000 (total value) insured to a 90% coinsurance clause would require $90,000 (90%). This allows for lowering the amount of insurance carried, but there is no room for error.

Coinsurance allows the insured to insure with a minimum coinsurance. For example, $l00,000 (total value) insured with a 90% coinsurance clause would require $l00,000 (90%).

The commercial property form requires insurance to property value with the application of a coinsurance clause.

Percentages available are:

80% coinsurance: No rating credit

90% coinsurance: 5% rating credit

100% coinsurance: 10% rating credit

Coinsurance can be suspended with the Agreed Value Option for a 5% surcharge. The best combination is the Agreed Value with the 100% coinsurance.

Building And Personal Property Coverage Form CP 00 10 06 95
If a Coinsurance percentage is shown in the Declarations, the following condition applies:
"We will not pay the full amount of any loss if the value of Covered Property at the time of loss times the Coinsurance percentage shown for it in the Declarations is greater than the limit of insurance for the property. Instead, we will determine the most we will pay using the following steps:

Multiply the value of Covered Property at the time of loss by the Coinsurance percentage;

Divide the Limit of Insurance of the property by the figure determined in step (1);

Multiply the total amount of loss, before the application of any deductible, by the figure determined in step (2); and

(4) Subtract the deductible from the figure determined in step (3).

We will pay the amount determined in step (4) or the Limit of Insurance, whichever is less. For the remainder, you will either have to rely on other insurance or absorb the loss yourself."

The following example illustrates this equation for determining coinsurance penalty:

$250,000 (value of property) X 80% (selected %) = $200,000 (limit to be carried)

$100,000 (amount of insurance)

$100,000/$200,000 = 50%

$40,000 (amount of loss) X 50% = $20,000 recovery

$20,000 minus $250 deductible = $19,750

$40,000 (amount of loss) - $19,750 (amount of recovery) = $20,250 IS NOT COVERED

In the case of a coinsurance penalty applying to two or more separate items, if one limit of insurance applies to two or more separate items, this condition will apply to the total of all property to which the limit applies. Let's take a look at an example.

The value of property is $250,000:

Building at Location No. 1: $75,000

Building at Location No. 2: $100,000

Personal property at Location No. 2: $75,000

The coinsurance percentage: 90%

The limit of insurance for buildings and personal property at locations #1 and 2: $180,000

The deductible: $1,000

The amount of loss is $50,000:

Building at Location No. 2: $30,000

Personal property at Location No. 2: $20,000

Putting these figures into our coinsurance equation, we arrive at the following conclusion:

Step (1): $250,000 X 90% = $225,000

Step (2): $180,000/$225,000 = .80

Step (3): $ 50,000 X .80 = $40,000

Step (4): $ 40,000 - $1,000 = $39,000.

Step (5): $50,000 (the amount of loss) - $39,000 (the amount of recovery) = $11,000 IS NOT COVERED

As for Agreed Value, under this optional coverage, the Coinsurance Clause is suspended for insureds who agree to carry a limit of insurance equal to at least:

80% (for specific insurance), or

90% (for blanket insurance) of the value of their property

For rate modification, multiply the 80% or higher coinsurance rate by 1.05.

Optional coverages
The following section regarding coinsurance can be found on the Building And Personal Property Coverage Form:
"G. Optional Coverages
If shown in the Declarations, the following Optional Coverages apply separately to each item.
1. Agreed Value
a. The Additional Condition, Coinsurance, does not apply to Covered Property to which this Optional Coverage applies. We will pay no more for loss of or damage to that property than the proportion that the Limit of Insurance under this Coverage Part for the property bears to the Agreed Value shown for it in the Declarations.
b. If the expiration date for this Optional Coverage shown in the Declarations is not extended, the Additional Condition, Coinsurance, is reinstated and this Optional Coverage expires.
c. The terms of this Optional Coverage apply only to loss or damage that occurs:
(1) On or after the effective date of this Optional Coverage; and
(2) Before the Agreed Value expiration date shown in the Declarations or the policy expiration date, whichever occurs first."

Working with coinsurance: Business Owners Policy (BOP)
The Business Owners Policy (BOP) does not have a Coinsurance Requirement but does have an Insurance To Value Clause. If the limit of insurance is at 80% to property value, the full replacement cost minus the deductible is paid. If not 80% to property value, then the greater of the actual cash value (ACV) or the 80% coinsurance calculation is paid.

"If, at the time of loss, the Limit of Insurance on the lost or damaged property is 80% or more of the full replacement cost of the property immediately before the loss, we will pay the cost to repair or replace, after application of the deductible and without deduction for depreciation, but not more than the least of the following amounts:
(b) If, at the time of loss, the Limit of Insurance applicable to the lost or damaged property is less than 80% of the full replacement cost of the property immediately before the loss, we will pay the greater of the following amounts, but not more than the Limit of Insurance that applies to the property:
(i) The actual cash value of the lost or damaged property; or
(ii) A proportion of the cost to repair or replace the lost or damaged property, after application of the deductible and without deduction for depreciation. This proportion will equal the ratio of the applicable Limit of Insurance to 80% of the cost of repair or replacement."

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Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state. This material is intended as a general guideline and might not apply to a specific situation. The authors, LunchTimeCE, Inc., CEfreedom, and Insurance Skills Center, and any organization for whom this course is administered will have neither liability nor responsibility to any person or entity with respect to any loss or damage alleged to be caused directly or indirectly as a result of information contained in this course.