Since the concept of Co-Insurance is fundamental principle of property and business continuation insurance, it is imperative that you understand it before considering the amount of insurance you buy.
Co-Insurance is simply an AGEEMENT BETWEEN YOU AND THE INSURANCE COMPANY, WHEREBY YOU AGREE TO MAINTAIN CONVERAGE UP TP A STATED PERCENTAGE OF THE VALUE OF THE PROPERTY YOU WISH TO INSURE, (usually 80%,90% or 100%). As a result of this promise, a significant reduction in the rate is given.
Should a loss occur, consideration is then given to the amount of insurance carried compared to actual values 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 that you carry is below the agreed percentage, you and the company then share the loss.
EXAMPLE: Assume the value of the property you are insuring is $1,000,000.00 and the policy contains a 90% Co-Insurance clause; this means you should be carrying at least $900,000.0 coverage. If you were only carrying $500,000.00 coverage and had a loss of $400,000.00 the Insurance Company would pay based on the following formula:
AMOUNT OF INSURANCE CARRIED
—————————————————— X AMOUNT OF LOSS = CLAIM PAYMENT
VALUE OF THE PROPERTY X 90%
———————————- x $400,000.00 = $222,000,00
$1,000,000.00 X 90%In this example, you would suffer a $178,000.00 Co-Insurance penalty!
A regular and careful review of the value of your insured property is essential if Co-Insurance penalties are to be avoided. We recommend your insurable values be frequently reviewed by a competent, independent appraisal company and must update with your insurance broker.The main reasons why almost a very high % of businesses are under insured are:
1. Lack of a good inventory system for your stock
2. Old machinery insured at 2nd hand equipment cost basis although you are covered for replacement cost and expect to replace the equipment in case of a loss
3. Not reviewing your policies year after year and not updating your policies when you purchase some additional equipment mid term.
4. Lack of awareness among business community
Cost of being underinsured is too high ….look into your insurance policy today and discuss with your broker.
This is just an simple explanation, speak to your broker or feel free to contact
Aaxel Insurance Brokers Ltd.
905-362-8080 ext 301