Nearly every homeowner, renter or business insurance policy includes coinsurance. It can be costly if you don’t fully understand the terms of your insurance contract.
A Homeowner policy does not typically include a section called “Co-insurance.” The clause is listed in Section I, Conditions of the standard Homeowners form HO-3. It is also found in any Business Insurance policy’s Loss Conditions section.
Turn to the Conditions section of your policy. Read the section titled “Loss Settlement”. To make it easier for you, I put a copy of this section in my book. The reason I wrote the book was to get you involved in your claim. The book will make you hundreds to thousands more, and I won’t take any of it. Get busy reading your policy.
Let me translate: Your insurance company will require you to have policy limits for the Dwelling that are equal to 80% of the total replacement cost of your building. This does not include foundations, underground pipes, wires, or drains. The insurance company will penalize anyone who does not have the required 80% coverage when they file a claim.
Simple. But dangerous for your cash flow.
No penalty if your home has a replacement price of $100,000. You are 100% covered to the value. It is important to be 100% insured all the time.
Remember that insurance to value does not mean you will insure your home or building for its current market value or selling price. You should insure your dwelling or building for the cost of rebuilding it completely. The cost of the land on which your building or dwelling is built should not be included. Insurance companies don’t insure dirt.
This example shows that you could be insured as low as $80,000 and still receive 100% of all claims without penalty. You would still technically be underinsured. You would not receive all the compensation you need to make you whole in the event of a major loss.
You could face a coinsurance penalty if you insure your property for less than the stated percentage.
It’s easy to calculate co-insurance using a simple formula:
Divide what you bought by what you SHOULD’ve bought.
DID x loss minus deductible = claim amountSHOULD
Here’s a quick example:
The property’s value is $150,000
Coinsurance percentage: 80%
Insurance coverage is limited to $100,000
The deductible is $250
Loss: $20,000
Step 1: $150,000 x 80 = $120,000 (the minimum amount you need to cover your coinsurance requirements)
Step 2: $100,000 (whatever you did) divided with $120,000 (should’ve done) =.67 or 67%
Step 3: $20,000 x 67% = $13,400
Step 4: $13,400- $250 = $13,150
You can see? It is very easy to understand.
There may be a coinsurance requirement for the Contents section of the coverage. This rule is the same as for penalties.
Problem is, most people don’t realize there is a problem with coinsurance until after they have suffered a loss.
There are several obvious reasons why property may not be insured.
1. You used an amount that was too low to replace your house when you filled out your insurance form. You could get this from:
A. Ignorance…This means you don’t know what it would cost to replace your house.
B. B. Simply use the same policy limits as your old policy on your new policy.
C. Buying a policy that is too expensive to save premium dollars.
2. When he submits your application, the agent does not know how much it would cost to replace your home.
3. Agent was offering a low price for your business and made some concessions to lower the premium.
The only way to reduce a coinsurance penalty, is to challenge it.
Your adjuster may inform you that a coinsurance penalty will be assessed to your claim. He should explain his calculations.
To calculate coinsurance, the adjuster must first calculate the value of your property. Everything else he does is based upon that calculation. Your coinsurance penalty will be increased if it is too high.
He will either calculate the Replacement Cost Value (RCV), or the Actual Cash Value (ACV). He will be able to choose which valuation to use according the policy. He can’t choose for himself. Most homeowner policies have RCV for the dwelling. Commercial property is generally ACV. However, an endorsement for RCV can be obtained for a small premium.
The adjuster can use the following tools to calculate the property value:
1. A Wild A** Guess (often done)
2. His estimating software. A few estimating software includes valuation, so he only needs to enter information about the age, condition, size, features, etc. and the software will do all the rest.
3. Marshall and Swift (M&S). Marshall and Swift are the industry’s standard for building valuation. Even if they don’t know how to use the database, all adjusters are familiar with M&S. If your adjuster isn’t familiar with M&S or how to use it properly, find another one as soon as possible. You need to look over the data the adjuster entered in order to get the valuation. The valuation will also be incorrect if he has entered incorrect data. If he calculated the area of your house as 2,000 square feet and you have 1,600 square feet, then the entire valuation will be incorrect.