Co-Insurance
Explained
|
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
actually $150,000.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.
|
|
