|Have you ever wondered what
the coinsurance clause on your policy means?
According to the independent Insurance Agents of
America, most business policies include a "coinsurance" clause, determining what
percentage of the value of your property must be insured in order to be fully
reimbursed for a loss.
If you insure your business for less than that amount your insurance company
imposes a "coinsurance penalty" once a claim is filed.
Here's how it works:
Let's say you have a building that you believe would cost $100,000 to
replace and a coinsurance penalty in your policy of 80 percent. You insure the
building for $80,000 thinking you have fulfilled the coinsurance clause. A fire
loss causes $60,000 worth of damage so you submit a claim. Your insurance
company subsequently determines that the replacement cost of the building is
To determine how much to pay on the claim, the insurer divides the
amount of insurance you purchased ($80,000) by the amount you should have
purchased (80% of $150,000 or $120,000). The result (two-thirds, or $40,000) is
the amount of your claim the insurer will pay.
If the building had been insured for at least $120,000, the insurer
would have reimbursed you for the full amount of the loss. Coinsurance can be
tricky and cost you a ton of money if you under insure your property.