In my nine years in the insurance industry, I have observed the anger of many good people (not my clients at the time) who paid premium for insurance coverage that didn’t respond the way they wanted it to. Many of these people were coming to me feeling like they were taken advantage of and treated unfairly. Time and time again, the real issue is that they didn’t understand the potential penalty within their policy, the same policy they have paid hard earned money to protect them in the event of a loss.
Farm and Commercial Insurance Policies include a co-insurance clause which is in place for a few reasons. The biggest reason is to make sure that insurance companies are collecting a fair premium for the risk involved. I have heard the argument time and time again – if something happens to my building, or my machinery, or my facility, it will not all burn down in one fire, or blow over in one tornado, therefore, I only want to insure half of it. When the claim happens, and the adjustor asks the client “which half were you intending to insure?”, the anger that I previously mentioned quickly shows up.
It is in situations like this where the insurer has the right to apply the co-insurance clause, which common states that the insured must insure to a certain percentage (commonly 90%) of replacement cost, or they will face a penalty based on the percentage of the value they insured the item for, versus what they were supposed to insure it for, multiplied by the amount of the loss.
When choosing your insurance broker, make sure that you are working with someone who will educate you on the details within your insurance policy or you may be penalized at a time where you need your policy to respond.Be sure to seek advice and purchase insurance from those who understand your business!