Have you insured your property to its full value? It can be tempting to underestimate the value of your property when purchasing insurance to obtain lower premiums. Someone thinking about employing this strategy might only want coverage to a certain level and be willing to accept the negative consequences of a loss that exceeds the policy limits.
What is Co-Insurance?
Property insurance policies contain provisions meant to discourage this behavior. One such provision is known as co-insurance, a concept often misunderstood by those without an insurance background. Co-insurance is listed as a percentage requirement, typically eighty percent (80%) for most policies. This percentage means that the insured is required to list the value of the property at a minimum of eighty percent of its actual value. If an insured's company has $100,000 of personal property stored at an insured location and an eighty percent co-insurance requirement that means the insured must list at least $80,000 for the value of the property on their insurance policy.
What Happens When Your Are Under-Insured
If the insured fails to meet its co-insurance requirement, any claims paid by the insurance company will be reduced by the percentage of under-insurance. This is done by calculating the amount of insurance the company should have had and determining what percent of that value the insured had actually purchased. Any claims paid out would then be reduced to that percentage. The company mentioned above was required to have at least $80,000 as their limit for their $100,000 of property. If they only carried $60,000, then they only gave 75% of the amount they were required to ($60,000 divided by $80,000). So if the company submits a claim for a $20,000 loss and the insurance carrier determines they are underinsured, the amount paid by the insurance carrier will be reduced to $15,000 ($20,000 times 75 percent.)
Loss Analysis Proves The Importance of Co-Insurance
While co-insurance may seem like an attempt by insurance carriers to require individuals and organizations to purchase higher limits of insurance, the actual reasons for the provision rest in loss analysis. A company with $100,000 in property is significantly more likely to suffer a $20,000 loss than a company with $20,000 in the property. For insurance rates to accurately reflect loss potential, companies with more property have to be charged higher premiums even if those companies might wish to purchase less insurance. Co-insurance helps serve this purpose by incentivizing companies to insure their property to its full value.
What Is Required
The 80% requirement does allow for some fluctuation in a companies’ property value. However, companies less worried about this have the opportunity to request a 90% co-insurance requirement for a small premium reduction.