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Avoiding the Co-Insurance Gotcha

By: Steve Goldman, CCIM

By William (Bill) Thomas, Chairman
TIS Insurance Services, Inc.
Exclusive to Goldman Partners Realty

Co-Insurance in a Property Insurance Policy is not at all similar to co-insurance in a Medical Insurance Policy. The co-insurance clause in a Property Policy is extremely important and must be understood. Co-Insurance in a Property Policy represents an agreement by the insured to insure property a certain percentage to “Actual Cash Value” or “Replacement Cost”, the higher the co-insurance clause, the lower the rate. The insured has the responsibility to meet the requirements of the co-insurance clause to avoid a penalty at the time of a loss.

As an example the insured purchases “Replacement Cost Coverage” insurance with the 90% coinsurance clause. At the time of loss the failure of the insured to comply with the 90% agreement results in a major penalty to the insured. At the time of loss the formula used to adjust the loss is as follows: Amount of insurance carried divided by amount of insurance that should be carried, multiplied times the loss. Use a building with a $100,000.00 Replacement Cost as the example with a 90% co-insurance clause. The building is $100,000.00 and the insured purchases only $50,000.00 of coverage. A $20,000.00 covered loss occurs. Settlement of the claim is now as follows: $50,000.00 (did carry) ÷ $90,000.00 (should have carried) x $20,000.00 (loss). Although the insured had $50,000.00 coverage the claims payment is only $11,100.00. Thus the insured is greatly penalized because the insured did not comply with the co-insurance clause insuring the property for $90,000.00 (90% of $100,000.00). There are two answers to this issue as follows:

1. Purchase the proper insurance to avoid a co-insurance penalty. This is the proper procedure and $100,000.00 coverage is appropriate and coinsurance violations would not be applicable
2. Purchase the “Agreed Amount Endorsement”.

Do not confuse market value, actual cash value, and replacement cost. Insurance companies issue most property policies on a replacement cost basis and replacement costs have not decreased even during the recession beginning in 2008.

TIS Insurance Services, Inc. has the expertise to work with our insured’s to calculate replacement costs and our Loss Control Department enjoys that expertise to avoid claims problems.
Call TIS at (865) 691-4847.
Ask for Morgan Thomas, President of Commercial Insurance Division.

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