How does coinsurance work on property insurance

Commercial Lender Requirements. Considerations For Green Building Retrofits. If so, check your property insurance policy for a coinsurance clause. Previous Post « Previous. Next Post Next ». Search for: Search. Free Download. Find the most recent research reports, browse our news, find articles from Development magazine and see all the content NAIOP has to offer. Most businesses carry some form of property insurance to cover significant damage or even a total loss.

Coinsurance is one of the least understood areas of property insurance — and unfortunately, failing to understand it could lead to thousands of dollars in losses if catastrophe strikes. Coinsurance is an agreement between an insurance company and a business owner to share the cost of a claim. In other words, the policy holder is required to hold a high enough insurance limit to cover a percentage of the property value in order to receive full compensation if there is a loss or damage to the property.

Coinsurance functions as a percentage of the replacement cost of the insured property, such as 90 percent, 80 percent, 70 percent, etc. An owner could face a big penalty if he or she decides to skimp on the insured value of the building or if the property value rises and the insurance amounts were not raised accordingly. Here is the formula for the penalty:. Agreed value is a set value for your property that insurers may use instead of appraising the value of your property after a loss.

You may be able to negotiate with your insurer to determine an agreed value when you purchase a policy. If a claim arises, the insurer will use the agreed value to handle the loss. Because the value of the property is already agreed upon, this would eliminate the risk of a coinsurance penalty. Value reporting requires a business to regularly report the value of their current property and inventory.

This alternative to coinsurance may be ideal for businesses whose property values vary over time depending on current inventory. For example, seasonal businesses may have much more inventory on hand during their busy season. Instead of having a coinsurance requirement, these businesses may choose value reporting. However, there is a higher risk of the policyholder being penalized if property is not valued accurately. Join Our Distribution List Today!

Coinsurance Clause Explained. How do you Calculate Coinsurance Penalties? What Policies Include a Coinsurance Clause? Share this story Facebook.