What is a coinsurance penalty?
How can a coinsurance penalty affect your insurance coverage?
In the insurance world, certain property insurance policies have a coinsurance clause. This clause can impose a coinsurance penalty if it is not met. Most business insurance policies include the coinsurance clause. The clause stipulates what percentage of the total value of your property must be insured to be fully reimbursed for a loss, even a partial loss. Most claims that we see are actually partial losses. The coinsurance clause is meant to stop someone from grossly under insuring a property in order to save money on insurance premiums.
How does coinsurance work?
The most common coinsurance clause states that the property needs to be insured for at least 80% of the value in order to avoid the coinsurance penalty.
You have a building valued at $1,000,000 but only want to insure it for $600,000. You may think that since you do not have a mortgage, $600,000 is enough insurance for you to have.
Now let’s go through a claim scenario
Claim Scenario For A Partial Loss (Most common type of loss):
You have a building fire which results in $400,000 in damages. You may be thinking that it is OK, since the $600,000 you will get the $400,000 since it was still under the total building insurance amount.
But, you failed to realize that there is a 80% coinsurance penalty clause in your property insurance policy. This means that the insurance company was requiring you to insure your building for at least $800,000 to avoid the coinsurance penalty. You failed to meet that requirement.
You may still be thinking that you paid for $600,000 in coverage, so they will pay you the $400,000 right? That would not be a correct assumption. Your claim payout will be reduced by the percentage of coverage that your building was under insured for.
In this case, the company needed to have $800,000 in property insurance coverage to meet the coinsurance clause. You decided to only pay for $600,000 in insurance coverage. So you only had 75% of the required building insurance coverage. Therefore, the claim payout after factoring in the coinsurance penalty, will be 75% of the amount that would have been paid out for the loss. So in this case, the payout after factoring in the coinsurance penalty, will be $300,000 ($400,000 x 75%).
So, under insuring your building to save a few hundred dollars on your insurance premium just cost you $100,000 in a reduced claim payout. An uncovered loss is something to factor in when you calculate your total cost of insurance.
Coinsurance Clause For Other Types Of Business Property Insurance:
Coinsurance is not only for building insurance coverage like in the example above. There are coinsurance penalty clauses for businesses that carry an inventory to sell as well.
Some examples are as follows:
- Auto dealer vehicle inventory
- Convenience store inventory
- Clothing shop inventory
- Cigar shop inventory
Contact Huff Insurance Today
Fill out the form here or give us a call at 410-647-1111. One of our experienced representatives will work with you to make sure you have the best business insurance in place for your needs. We will work with you to try to avoid any coverage issues that may trigger the coinsurance penalty in your policies.