How Does the Insurance Company Calculate the Insurance Value of My Building or Home? Coinsurance

In our last blog entry we discussed types of valuations for insuring your building. One of the last subjects we covered was something called coinsurance. What is coinsurance and how does it affect my property insurance?

 

All valuation methods have coinsurance clauses in their contracts. Why this is important is the insurance carrier wants to make certain that the building or item they are insuring is insured to full value. If this wasn’t a consideration no one would insure a property item to full value but would expect to be reimbursed in the event of a loss at full value. In another words, a replacement cost valuation indicates that your building is valued at $500,000. You only insure the building to $100,000 but expect that in the event of a loss to be reimbursed for the full cost of $500,000. I know what you are thinking, that doesn’t even make sense! Why would someone insure their property for less than the value and expect to get a settlement at the full value? The truth is this happens all the time. In fact, most lawsuits are over valuation. There are a lot of reasons that owners may not select the full insurance value for their building and property and often it is simply a misunderstanding of valuation. Just like we discussed last week an owner who is convinced that the building isn’t worth any more than the tax assessed value or decides that the building isn’t worth anymore than a value a realtor told them could be shocked to find out that the actual cost to replace the building is far more. And, what happens over time? If you guessed that costs go up you would be right. So if it cost you to $400,000 to build your building twenty years ago does it make sense that it would still cost $400,000 to build it today? Of course not, but in many cases I find when working with clients that they haven’t checked their valuation in years and the coverage that they had stopped being adequate a long time ago. Unless you have inflation guard included in your insurance plan your valuation is static and will remain that way until your request the coverage changed.

 

Coinsurance applies when a building or property item is underinsured. Most insurance companies will require you to insure your building to 80%, 90% or 100% of replacement cost. If the actual cost to replace the building is more than the insurance that you carry by contract the insurance carrier can levee a coinsurance penalty. In the event of a total loss your inability to collect the full amount of replacement for the building can change what type of building that you end up with. However, in the event of a partial loss I believe that the coinsurance penalty is even more meaningful. Say that you had a partial fire loss to your $500,000 building. The damage was $150,000. Unfortunately, you have been insured for $350,000 which is only 70% of the true replacement cost of the building. Your insurance contract requires that you maintain a replacement cost value of at least 90%. Your claim will be subject to a 20% coinsurance penalty and you will not receive the full cost of the insurance settlement for the repairs. So, based on your $150,000 claim the carrier will use a coinsurance penalty of 20% which is $30,000. You will need to cover that plus you’re deductible.

 

This gets even more complicated when you have multiple buildings and values. The best way to make certain that you are adequately insured is to have a replacement cost valuation completed by your agent and company at least every two years. Ultimately, you the owner are responsible for selecting the correct insurance coverage however there are tools available to help you and your insurance agent can be a great resource in helping you to properly insure your building and its contents.