In this article we take a look at how some common insurance clauses and practices can work to your detriment – and how to avoid these problem areas.

Coinsurance Clause

Many insurance policies available today include a Coinsurance Clause. Essentially, a Coinsurance Clause will penalize an Insured if it turns out that they have not purchased a ‘satisfactory’ amount of coverage on either their inventory, building, or both.

Take an example where an Insured has property with a replacement value of $1,000,000, a Coinsurance Clause of 80%, and a policy limit of $650,000. In the event of a $500,000 loss, how much do you think the Insured would collect (before deductible):

A. $500,000
B. $650,000
C. $406,250

In this example, the Insured would only collect $406,250. The Coinsurance Clause mandated that the Insured carry a limit of at least 80% of the value of the property, which here would be $800,000. Any partial loss would be paid using the following equation:

(Limit carried / limit required) x amount of loss

Limit Required

Did the Insured make a conscious decision to buy a lower limit, hoping to save on premiums? Did the agent not determine the real replacement cost of the property, nor recommend an appropriate limit? All are possible, but in any event, the Insured is out of pocket almost $100,000.

The Solution – The Property Policy available through the Marble, Stone and Tile Insurance Connection doesn’t have a Coinsurance Clause – – so that if a conscious decision is made to buy a lower limit, or the property turns out to be worth more than thought, the Insured doesn’t get penalized.

This coverage is available for all inventory, and rented or owned buildings and equipment.