But I only paid X for that building, why is the insurance company requiring me to carry Y in replacement coverage? This is a common complaint from insureds and prospects and the answer lies in the concept of co-insurance.
Co-insurance, generally, is the sharing of risk between the policyholder and the insurance company. In most cases, co-insurance clauses are included in property insurance policies to ensure that the policyholder has a financial stake in the insured property.
The purpose of co-insurance is to encourage, some would say require, policyholders to insure their property for at or near its full value. If a property is insured for less than its actual value, the policyholder may be subject to a co-insurance penalty in the event of a loss. This penalty is typically calculated as a percentage of the claim that the policyholder is responsible for paying out of pocket.
For example, suppose a property is insured for $500,000, but its actual value is $1,000,000. If the policy has an 80% co-insurance clause, the policyholder is required to insure the property for at least 80% of its value, or $800,000. If a loss occurs, and the policyholder has only insured the property for $500,000, the policyholder is underinsured by 37.5% ($500,000 / $1,000,000) and will be subject to a co-insurance penalty. If the loss is $100,000, the policyholder would be responsible for $37,500 (37.5% of the claim) out of pocket.
Co-insurance clauses can be tricky to navigate, but there are a few key things to keep in mind when purchasing property insurance. First, it is important to ensure that you have adequate coverage for your property. This means that you should insure your property for its full value, considering any renovations or improvements that have been made. Underinsuring your property can lead to significant out-of-pocket expenses in the event of a loss.
Second, it is important to read your insurance policy carefully to understand the co-insurance clause. Make sure that you understand the percentage of co-insurance and how it is calculated. It is also a good idea to speak with your insurance agent or broker to clarify any questions you may have about co-insurance.
Finally, it is important to stay up to date with the value of your property. If the value of your property changes significantly, it may be necessary to adjust your insurance coverage to ensure that you are fully protected in the event of a loss.
In conclusion, co-insurance is an important concept in the property insurance space that policyholders should be aware of. While co-insurance clauses can be confusing, they are designed to ensure that policyholders have a financial stake in their insured property. To avoid co-insurance penalties and ensure that you are fully protected, it is important to insure your property for its full value, read your insurance policy carefully, and stay up to date with the value of your property. By following these simple steps, you can help ensure that you are fully protected in the event of a loss.