CO-INSURANCE - WHAT DOES IT MEAN?
On most commercial insurance policies and even on some personal line policies there is a CO-INSURANCE percentage. The norm is currently 90%, but you can still see a few policies with 80% CO-INSURANCE. CO-INSURANCE is a function of Replacement Cost, which is different from Market Value. But, what does all this mean? It is very important to understand the values of your CO-INSURANCE clause. You don’t want to be under-insured and you certainly don’t want to pay for being over insured.
Basically, it is the percentage leeway you have in your stated coverage. With CO-INSURANCE, you will be penalized for the amount you are under-insured in the case of a claim.
Example: Let’s say your property is insured for $250,000, your CO-INSURANCE is @ 90%, and you have a loss of $100,000. At the time of the claim, the Adjuster appraised your property, using standardized methods, at $350,000.
Take the Actual Value of $350,000 and multiply by your CO-INSURANCE of 90% = $315,000. That is the minimum value you should have insured your property for.
Now, for the penalty! You take the insured amount of $250,000 and divide by the CO-INSURED value of $315,000 to determine the amount you were actually insured for. In this case you were only insured for 79% of the CO-INSURED value. Therefore, you will only be reimbursed for 79% of your claim. If you claim was $100,000 as indicated earlier you would only receive $79,000 minus any deductible your policy carries.
So you can see it is very important to stay on top of the values of your Property and make sure they are within the range of your CO-INSURANCE percentage.