We have recently had a real estate rental property owner switch to us because of a severe Coinsurance Penalty that was incurred during a recent fire loss. I find it important to further your education on this TRICKY insurance term/condition!
Coinsurance is very common within apartment building insurance policies and single family rental insurance policies. Coinsurance is an arrangement by which the insured, in consideration of a reduced rate, agrees to carry an amount of insurance equal to a percentage of the total value of the property insured. If you have a coinsurance clause on your policy, the following conditions will apply.
**The carrier will NOT pay the full amount of any loss if the value of the property at the time of the loss multiplied by the coinsurance percentage shown in the declarations is greater than the limit of insurance for the property. In other words, you must be insured to at least 80%, 90%, or 100% (whatever the coinsurance percentage is on your policy) for the carrier to payout the full value of the loss. If you have an 80% coinsurance clause, this is the minimum property value you can use: RC Value (NOT MARKET VALUE) of property: $200,000 Coinsurance percentage listed in the declarations: 80% Minimum property value that should be listed: $160,000
**When a property falls below these guidelines, the carrier will use the following steps to determine the maximum payout.
1) Multiply the value of the covered property at the time of the loss by the coinsurance percentage.
2) Divide the limit of insurance of the property by the figure determined in step 1.
3) Multiply the total amount of loss, before the application of any deductible, by the figured determined in step 2.
4) Subtract the deductible from the figure in step 3.
The total that is determined in step 4 is the most the carrier will pay out. The key item in these steps is the replacement cost value of the property at the time of loss compared to the property value listed in the declarations. The one that is calculating the property at the time of the loss is the insurance carrier. The one that is calculating the limit in the declarations is your agent. It is always different, and more times than not the carrier is always higher. So, if the carrier comes back saying your property is valued significantly higher than your agent had it rated at, then you have no choice but to pay a coinsurance penalty. Well, that is not true, you can hire an independent adjuster to fight the insurance company, but then you will be paying the adjuster any amounts he/she is likely to gain on your behalf.
Here is an example of a client of ours that had an 80% coinsurance clause on his policy before he came to us. After you see the numbers, you will understand why he went shopping for a new insurance company. He had a $45,000 loss at a single family rental home in which he had a total limit of insurance of $60,000 and a $5,000 deductible. The insurance company ran the value of the property at $117,000 at the time of the loss. Then the insurance company ran their formula and calculated that his settlement would be $22,900. That means he was out of pocket for $22,100.
Our only advice is to eliminate coinsurance altogether on your policy. You can never guess how the insurance company is going to evaluate your property, so take the guesswork out of it. If you have NO coinsurance, your limit is your limit, with the only out of pocket expense being your deductible. The carrier will not SLAP you with any coinsurance penalties!
Would you like our team to do a comprehensive review of your real estate building insurance coverage? Contact us today for a real estate property insurance proposal!