Coinsurance is very common for those who own apartments, and other commercial real estate buildings/assets. Coinsurance is an arrangement by which the insured, in consideration of a reduced rate, agrees to carry an amount of insurance equal to a percentage of the total value of the property insured.
We have recently had a real estate rental property owner transition to us because of a severe coinsurance penalty that was incurred during a recent fire loss—that cost this owner over $25K out-of-pocket. We find it important to expand your knowledge on this tricky insurance term/condition!
If you have a coinsurance clauses on your building policies, the following conditions will apply:
#1. Multiply the value of the covered property at the time of the loss by the coinsurance percentage.
#2. Divide the limit of insurance of the property by the figure determined in step 1.
#3. Multiply the total amount of loss, before the application of any deductible, by the figured determined in step 2.
#4. Subtract the deductible from the figure in step 3.
The total that is determined in step 4 is the most an insurance carrier will payout. The key item in the steps above is the replacement cost/value of the property that you own/manage…at the time of loss, compared to the property value listed in the declarations. The party that is calculating the property value at the time of the loss is your insurance carrier. The party that is calculating the limit in the declarations of your insurance policies is your insurance agent. It is always different, and more times than not your insurance carrier is always higher. So, if your insurance carrier comes back saying that your property is valued significantly higher than your insurance agent had it rated at, then you have no choice but to pay a coinsurance penalty.
Our advice is to eliminate coinsurance altogether on your building insurance policies. You can never guess how an insurance company is going to evaluate your properties, so take the guesswork out of it. If you have NO coinsurance, your limit is your limit, with the only out-of-pocket expenses being your deductible. This means, your insurance carrier cannot slap you with any coinsurance penalties!
Within your property management company—-what are your policies/procedures for reviewing your property insurance policies for coinsurance clauses?
Focusing on coinsurance…how does this tie into your current real estate and apartment/commercial building insurance coverage? What do your insurance policies require that your building insurance limits should be?
Would you like our team to do a comprehensive review of your real estate building insurance coverages—related to coinsurance clauses?
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Industry Knowledge, Real Estate Building Insurance
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Craig Simmons
Power Insurance & Risk Management Group
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