The Dangers of Coinsurance

property loss

When a business owner thinks of insuring his or her building and its contents, many think of a number that they will be comfortable receiving in the event of a catastrophic loss. You would not believe how many times I’ve heard owners say things like “If this place burned, I would not rebuild it the same, $400,000 is more than enough” or “I will just cover my machines for $50,000 instead of $150,000 because I know I could find replacements for $50K.” This line of thinking is completely understandable and stands to reason for business owners that are trying to reduce costs and increase profitability. However, there is a dirty little secret your insurance carrier doesn’t want you to know about and many agents never fully explain:   COINSURANCE

Coinsurance is a mechanism that ultimately allows your insurance carrier a means of reducing the amount they have to pay you at claims time. It typically comes in a variety of different percentages (usually either 80%, 90%, or 100%) which you can see listed on the property declarations page of your policy next to your property limits. Here is the formula:

        Insurance Carried

______________________________________          X          Loss             =         Amount Carrier Pays

      Insurance Required                                                                        (less your deductible)                  

 

So here is how that looks in a real world example:

Joe has a machine shop. He chooses to cover his large CNC machines for $250,000 because he knows that he can buy used machines at auction for much less than this. Replacing his machines with new ones from the factory would cost nearly $1,000,000. Joe’s commercial insurance policy indicates that he does in fact have a $250,000 limit for his contents with a 90% coinsurance. One day, Joe has a major loss that completely ruins one key component of his machines beyond recovery. The total amount of the loss is $200,000. Distraught and with a time-sensitive need to get his business back on its feet, Joe reaches out to his insurance carrier to collect his check for $200,000 since it is under the $250,000 limit that he paid for. Here is what actually happens because of coinsurance:

 

250,000 (the insurance he carried)

_____________________________________     X        200,000 (Loss)      =      $55,500!     This is all Joe gets paid.

900,000 (90% of 1,000,000 which is what he                                                     The other $145,000 comes

agreed to carry since his policy has coinsurance)                                                   out of Joe’s pocket!           

 

There are several ways to eliminate coinsurance altogether and avoid such a devastating blow. Buying and paying for the full limit of coverage is not the only way to avoid coinsurance penalties. We can still remove your coinsurance without greatly increasing your premium. Call and find out how today!

 

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