Commercial Property Coverage Tips

Commercial Property Coverage Tips

March 03, 2021
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Commercial Property Coverage Tips – The Coinsurance Clause and the Potential Impact to Claim Payments

There are several factors that determine the cost and availability of Commercial Property Insurance.  These factors include the Construction, the Occupancy, the building Protections and the Exposure of the surrounding area.  This is commonly referred to as the COPE Evaluation and is the primary underwriting consideration.

While these factors determine the pricing and coverage terms that a carrier may provide, there is an often overlooked and commonly misunderstood rating factor and coverage clause that may arise in the event of a claim under the policy.  This clause is referred to as Coinsurance and is designed to protect both the insurance carrier and the insured client in the event of a covered loss.

Although this is the same term that many Health Insurance providers use to describe an insured’s participation in a claim, it is not at all the same concept when it relates to Commercial Property Insurance.

Insurance rates are calculated by carriers based upon certain assumptions such as clients purchasing insurance that is in line with their actual exposure (If you have a $1,000,000 building, you will purchase $1,000,000 in coverage).  When a client either knowingly (or accidentally) underinsures their building or contents, the carrier faces exposure that the premium does not support.  To reduce the exposure to fully covering claims for an underinsured building, the carrier can utilize a Coinsurance clause.  With some exceptions, most carriers either utilize an 80%, 90% or 100% Coinsurance form.  Simply put, this gives the carrier the ability to reduce the amount paid on a claim (even a partial loss) if the insurance coverage in place falls outside of the required amount based upon the Replacement Cost of the Building at the time of the loss.

 A simplified example of the Coinsurance clause impacting a claim follows.  This is based upon a building with a $1,000,000 Replacement Cost, a policy with a 90% Coinsurance clause and a purchased policy limit of $700,000 (underinsured).  If the building suffers a covered loss of $500,000, here is how this sample policy would respond.

Due to the carrier utilizing a 90% Coinsurance clause, they can impose a penalty on a claim if the policy holder has a limit of less than 90% of the actual replacement cost.  In this instance, the minimum requirement would be $900,000 (90% of $1,000,000).  The claim penalty percentage is calculated by starting with what was purchased ($700,000) divided by what the policy required ($900,000) and applying this factor to the claim.  $700,000 / $900,000 = 77.7%.  This factor is applied to the loss and the claim payment is reduced accordingly.  A $500,000 claim would only be reimbursed $388,888.  Although the insured purchased limits exceeding the loss, the Coinsurance clause has had a major impact to the claim payment.

Let the experts at Galt Insurance provide an in-depth analysis of your current coverage to identify this exposure as well as the many others that can be hidden inside the policy language.  It is best to identify these items before the claim happens!