Co-Insurance: One of the Trickiest Concepts in Commercial Insurance


If you own a business, you know how important insurance is. When you look at your business insurance Declarations Page, do you fully understand what each line item on it means? Don’t worry too much, few people actually do. But there are a few lines that you must understand, as your business depends on it.

In this article, I want to focus on the “Coverage A – Building” and “Business Personal Property” lines, and more specifically the dreaded Co-Insurance requirement.

To understand the concept of Co-Insurance, first we must look at the whole reason we purchase insurance. We purchase insurance to help us recover from the unexpected, and by unexpected, we’re talking about the absolute worst thing that could happen. What if a fire tore through your business location, leaving only the charred remains of your favorite pen? Or maybe it’s a flood of 12 feet of sewer water that turns your sales counter into a raft? I know, I know, those things would probably NEVER happen. That’s a commonly held belief. And this commonly held belief is why people are often tempted to insure their property for an amount that represents the amount of loss that they will probably incur. For example, your $500,000 building won’t likely burn to the ground, the fire department would surely put the fire out before that happens. So why not insure it for only $250,000?

The policy contract is designed to pay for whatever happens, big and ugly, or small and manageable. But the premiums are based on the biggest and ugliest. And there is a lot of math that goes into rating, and to be fair we need to respect the math. So that’s why we have Co-Insurance requirements.

On your policy Declarations Page, next to Coverage A-Building, you see a coverage limit with a Co-Insurance number, often it’s 90%. This means that according to the terms of the contract, you are required to insure your building for at least 90% of the actual cost to rebuild the entire structure. If you don’t meet that requirement, your loss will be settled proportionately to the amount of coverage you actually purchased.

Let’s go back to your $500,000 building that you decided to insure for only $250,000. According to the Co-Insurance requirement, you should have had at least $450,000 ($500,000 x 90%) worth of coverage. Let’s say you suffered a $100,000 loss. Because you failed to meet the requirement, your claim will be settled thusly:

      Amount of Insurance you Had        x     Amount of Loss    =    Payout
         Amount you Should Have

Or:       $250,000       x    $100,000      =   $55,000 payout
            $450,000

When you consider the possible ramifications of under-insuring your property, it makes a lot of sense to do it right. Talk to your broker about your coverage limits, to make sure you won’t be “under water” when you find yourself under water.

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