Commercial Property Insurance: Why to Consider Your Coinsurance Provision

Posted by Paula Johnson on February 2, 2018

Do you have an adequate limit of insurance on your commercial building? Be aware that if your business property is not adequately insured at the time of loss, you could be subject to a penalty.

A standard provision in the commercial property insurance form is coinsurance. This provision states that you, as the insured, agree to insure the value of your property by the percentage shown in the policy declaration page, typically 80%. It further specifies that you, the insured, will recover no more than the amount of insurance purchased, to the amount of insurance required multiplied by the amount of the loss.

What does that mean for your business? It can cost you in thousands of dollars. Here is a breakdown of one common example of underinsurance.

Company A
Value of Commercial Building: $500,000

Insurance Coverage
Coinsurance Requirement: 80%
Deductible: $500
Limit of Insurance on Policy: $250,000

The Loss
In this example, a fire occurs in the building. The amount of loss is $100,000.

What happens to Company A?
Based on the 80% coinsurance requirement, Company A is required to carry $400,000 ($500,000 X 80% = $400,000).
The limit of insurance they purchased, however, was only 62.5% of the building’s value ($250,000 divided by $400,000 = .625).
Therefore, the insurance company would only cover that portion of the insured loss ($100,000 less X .625 = $62,500). Taking into account their deductible, ($62,500 less $500 deductible = $62,000), $37,000 would not be covered!

This penalty, thankfully, can be avoided. Review your policy limit and coinsurance percentage. If this is a concern for your business, we can adjust your limit of insurance to avoid a coinsurance penalty or add an agreed value endorsement.

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