While policyholders should strive to provide the insurer with complete and accurate values for buildings and business personal property that are the subject of insurance, policyholders should also understand the basic workings of the co-insurance condition. In this article, authored by Craig Stanovich, we’ll review potential penalties for underinsurance.
Meet Mitch – a commercial real estate investor, who owns, under his real estate corporation, over 50 buildings located in the city, as well as the nearby suburbs. Mitch’s real estate portfolio consists primarily of leased retail and office space, with some service occupancies, as well. Mitch is preparing to purchase another building in the city and is arranging a mortgage with a new lender – Paperless Lending. To his surprise, the lender has rejected an insurance binder obtained by his risk manager Jess, from his insurance agent. Paperless Lending does not accept building insurance with co-insurance – and the binder given to Paperless Lending lists 90% co-insurance clause.
Co-insurance As Mitch relies on his risk manager Jess, to understand his insurance coverage, he has never read his insurance policies. But now he is alarmed by “co-insurance,” as it seems to Mitch – based on his limited dealings with health insurance – that his insurance company will never pay more than 90% of any loss that he has, regardless of the amount or limit of insurance he has purchased. This sounds problematic, and he immediately arranges to meet with Jess and his insurance agent, Diana, to discuss this matter.
Co-insurance Explained At Mitch’s request, Jess and Diana explain the concept of co-insurance. At the outset, they make clear to Mitch that co-insurance in property insurance is not the same as the 80/20 cost sharing in some health insurance policies. Instead, in property insurance, co-insurance generally means Mitch must purchase a certain limit of insurance on his building – the limit purchased must be no less than a denoted percentage of the full value1 of the building. Here, the percentage is 90%. Because Mitch did obtain, as part of his due diligence, a professional appraisal that determined the replacement value of his building as $5 million, Jess and Diana tell Mitch that he must purchase a limit of no less than 90% of $5 million or $4.5 million. If he does not purchase a building limit of at least $4.5 million, Mitch will face a penalty as a “co-insurer.”Read More »Co-insurance in Commercial Property Insurance Explained