Your business may feel this rise in cost if your coverage doesn’t extend far enough to cover such a quick and drastic change. You’re much more likely to experience a partial loss than total loss; however, rates are set based on your property being insured to its full value, so if you find that you’re underinsured after a partial loss, you might not recover the full amount of the damage from your insurance company. The coinsurance agreement in your policy accounts for this. It is vital to make sure your policy takes coinsurance into consideration. Here is some common coinsurance language relating to commercial property policies and an example of how it would apply:
If a Coinsurance percentage is shown in the Declarations, the following condition applies.
a. We will not pay the full amount of any loss if the value of Covered Property at the time of loss times the Coinsurance percentage shown for it in the Declarations is greater than the Limit of Insurance for the property. Instead, we will determine the most we will pay using the following steps:
(1) Multiply the value of Covered Property at the time of loss by the Coinsurance percentage;
(2) Divide the Limit of Insurance of the property by the figure determined in step (1);
(3) Multiply the total amount of loss, before the application of any deductible, by the figure determined in step (2); and
(4) Subtract the deductible from the figure determined in step (3).
We will pay the amount determined in step (4) or the limit of insurance, whichever is less. For the remainder, you will either have to rely on other insurance or absorb the loss yourself.
Value of the property $400,000 Coinsurance percentage 80% Limit of insurance $250,000 Deductible $1,000 Amount of the loss $50,000
Step 1: $400,000 x 80% = $320,000 (the minimum limit you would need to meet your coinsurance requirement) Step 2: $250,000/$320,000 = .78125 Step 3: $50,000 x .78125 = $39,062.50 Step 4: $39,062.50 – $1,000 deductible = $38,062.50 maximum you would be paid not including depreciation
Imagine having to cover $11,937.50 out of pocket rather than just your $1,000 deductible because you were underinsured. No one wants to find themselves in this situation! Two or three years ago, you may have been able to rebuild your building for $250,000. Given the increase in cost of building materials, do you think that would cover costs now?
Normally, we recommend going with 90% coinsurance while making the limit 100% of the value. This makes your likelihood of coinsurance applying to a claim very small while at the same time giving you a slightly better premium rate than the 80% coinsurance offers. Coinsurance can lead to significant portions of a claim that you might be responsible for—even after the deductible—if it’s determined you’re underinsured by the adjuster. Be sure to explore your coinsurance options thoroughly before you find yourself underinsured.
About Heacock Insurance – Serving Central Florida since 1922.
Heacock Insurance is a fifth-generation, family-owned agency serving Central Florida since 1922. Founded in Sebring by Austin Heacock, his agency was, at the time, the only insurance agency located along “The Ridge” of Central Florida. Austin’s core belief in starting his endeavor was to be an honest and dependable provider of services he knew people needed.
Nearly a century later, with offices in Lakeland and Sebring, at Heacock Insurance, it’s our policy to hold true to the family values of professional integrity, commitment and personal service upon which we were founded.