Part 1 of 2
If you look closely at your insurance policy you will notice the phrase 80% or 90% Co-Insurance. Some believe that means they will get paid 80% or 90% of the claim. This is an incorrect assumption. Co-Insurance is a clause in certain property policies which provides for the application of a penalty for losses when owners of property fail to insure, as a minimum, to the percentage of the value of such property as specified by the insurance company i.e.: 80% or 90%.
An example: if you have to carry insurance up to 80% or 90% of the value of your building and/or contents, whatever the case may be. If you don’t, the company pays claims only in proportion to the amount of coverage you do carry.
The following equation is used to determine what amount may be collected for a loss:
Amount of Insurance Carried x Loss = Payment
Amount of Insurance that
Should be Carried
Example A
Mr. Right has an 80% co-insurance clause and the following situation:
$100,000 building value
$ 80,000 insurance carried
$ 10,000 building loss
By applying the equation for determining payment for the loss, the following amount may be collected:
$80,000 x $10,000 = $10,000
——-
$80,000
Mr. Right recovers the full amount of his loss because he carried the coverage specified in his co-insurance clause.
Example B
Mr. Wrong has an 80% co-insurance clause and the following situation:
$100,000 building value
$ 70,000 insurance carried
$ 10,000 building loss
By applying the equation for determining payment for partial loss, the following amount may be collected:
$70,000 x $10,000 = $8,750
——-
$80,000
Mr. Wrong’s loss of $10,000 is greater than the company’s limit of liability under his co-insurance clause. Therefore, Mr. Wrong becomes a self-insurer for the balance of the loss– $1,250.
Be sure to seek advice and purchase insurance from those who understand your business!