For many commercial property and business insurance policies, Co-Insurance is a fundamental principal of your contracted coverage. It is important you understand how it works because in essence the clause imposes a penalty in event that you are underinsured.
With Co-Insurance, you agree to maintain coverage up to a percentage of the value of the property you wish to insure, typically 80%, 90% or 100%. This percentage is stated on your policy form. As a result of this promise, a significant reduction in the premium charged is given.
In the event a total loss occurs, the Co-Insurance requirement is waived and the policy limits are paid. However, should a partial loss occur, consideration is given to the amount of insurance carried compared to the value of the property prior to the loss.
If the amount of insurance is within the agreed Co-Insurance percentage requirement, the loss is paid in full, up to the policy limits. If however, the amount of insurance carried is below the agreed percentage, you and the Company then share the loss.
EXAMPLE: Assume the value of the property you are insuring costs $100,000 to replace and the policy contains a 90% Co-Insurance clause. This means you should be carrying at least $90,000 of coverage. If you only carried $60,000 of coverage and had a loss of $30,000, the Insurance Company would pay based on the following formula:
- what you did insure for X the amount of claim = Paid Loss
- what you should have insured for
- $60,000 X $30,000 = $22,500
90,000
This example shows that only $22,500 of the $30,000 claim would be paid due to under-insurance. You would have to contribute $7,500 of your own money (in this example) to get back in the same place as before the loss. All the more reason to make sure that your policy limits are adequate.
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