Commercial Property Policy
How Much Coverage
Coinsurance Clause - While the Coinsurance clause is less widely used
than in previous years, it is still made part of many forms of insurance. In
some instances, insurance is offered with or without such a clause, with
acceptance at the option of the insured.
The rationale for the use of the co-insurance clause develops out of the
fact that most losses are partial. As a consequence, some property
owners are inclined to carry less insurance than is dictated by the value
of the property at risk, counting on the fact that a loss will be brought
under control before it has completely destroyed their property, while
more prudent property owners will carry insurance that more closely
reflects the value of the property at risk. Different insureds will then be
paying varying premiums, thereby contributing unevenly to the pool of
premiums from which all losses are paid.
Thus, assume that of two property owners, each carrying a stock worth
$300,000, owner number 1 insured his stock for $240,000; owner
number 2 elected to carry only $150,000 of insurance. Each sustains a
$60,000 loss and would be fully covered for the loss, although owner 1
has been paying twice the premium of owner 2.
To distribute the cost of insurance more equitably among all
policyholders, many forms contain a clause under which the insured
agrees to maintain insurance of not less than a given percentage of the
actual cash value of the property at the time of the loss. A reduced rate
is granted the insured on policies which include a clause of this kind. The
amount of the reduction increases with the percentage of coinsurance.
The form stipulates that the Coinsurance clause will be applicable only if
there is inserted in the Declarations a percentage figure under the
heading "Coinsurance."
The most commonly used percentage is 80%, although other
percentages are used. The general principle remains the same,
regardless of the particular percentage used.
Thus, under an 80% coinsurance clause, the insured agrees to carry
insurance of not less than 80% of the actual cash value (or replacement
cost, depending upon the valuation method covered in the policy) of the
property at the time of the loss. If the insured carries less than this
agreed percentage of insurance, he will not be entitled to collect in full for
a loss but will have to bear part of it. (The insured will be co-insuring the
risk together with the insurance company.) The company will be liable
only for such percentage of the loss as the amount of insurance carried
bears to 80% of the actual cash value of the property at the time of loss.
The percentage of loss for which the company is liable under these
circumstances may be expressed by the formula:
P x L = A
R
Where P is the amount of insurance Purchased, R is the amount of
insurance Required - the minimum coverage of the actual cash value of
the property stipulated at the time of the loss, L is the amount of the Loss,
A is the amount for which the company is liable.
EXAMPLE: Assume property worth $100,000 has been insured for
$40,000 in an insurance policy which contains an 80% coinsurance
clause. The insured suffers a $10,000 loss. The insurer is liable only for
one-half of the loss, as follows:
P amount of insurance purchased $40,000
R = amount of insurance required = $80,000 = ½ of the loss
Contrast the above situation with that of a second insured who complied
with the 80% Coinsurance clause in his policy and insured his stock of
$100,000 under a policy of $80,000. Again assuming a $40,000 loss, the
loss would be settled in full, as follows:
P Amount of Insurance Carried $80,000
R = Amount of Insurance Required = $80,000 = 100% of Loss
Often, actual appraisals of the value of the property are not made when
the policy is issued, depending upon the limits of insurance requested
and the underwriting philosophy of the insurer. Effort is often made,
however, by the company to ascertain whether the insured is living up to
his or her requirements under the Coinsurance clause. The method of
calculation of building limits and building cost estimators vary widely
between insurers. The expenses of an actual appraisal are usually
saved for large risks. In spite of the methods used by the underwriter,
the practical effects of the Coinsurance clause are felt only when the
loss occurs. At that time, the company determines whether the insured
has complied with the provisions of the Coinsurance clause and, if not, to
what extent he will have to bear a part of the loss.
The Coinsurance clause takes into account the actual cash value of the
property at the time of the loss. It is of no significance that the amount of
insurance may have been adequate when the policy was issued. If the
value of the property has increased, the insured is obligated to increase
the amount of insurance, in order to comply with the provisions of the
Coinsurance clause and to avoid being a coinsurer.
The insured never can collect more than the amount of the insurance.
Thus, in the first of the two examples given above, where the insured
carried $40,000 of insurance on stock worth $100,000 at the time of the
loss, and suffered a total loss of $100,000, he would collect no more
than $40,000---the amount of the policy.
The effect of the Coinsurance clause on an insured's recovery will be
the same whether he carries one or more policies on the property. Each
policy is liable only in the proportion that the amount of insurance in the
policy bears to the percentage stated of the actual cash value of the
property. Thus, in the first illustration used above, where the insured's
property was worth $100,000 if he carried two policies on the property
of $20,000 each, each policy would be liable for 1/4 of any loss. Both
policies together will be liable for 1/2 of any loss, the same result as
when there was only one policy of $40,000.
The Coinsurance clause percentage is not the maximum percentage of
any loss that the insured may collect. It is merely the minimum amount of
insurance which the insured must carry in order to, collect losses in full.
Any insured who maintains this required amount of insurance will collect
on any loss in full, up to the face amount of the policy. Furthermore, the
Coinsurance clause does not limit the amount of insurance that may be
carried. Any owner of property may carry 100%insurance to value. In
the event of a loss, the insured will be entitled to collect 100% of the
policy, if the loss is total.
Most states prohibit the use of coinsurance clauses on certain types of
property, most generally on dwellings and household contents. Other
states rule that policies containing such clauses must be clearly stamped;
others stipulate that the insured will be entitled to the refund of any
excess premium if it is found that he carried more insurance than the
value of his or her property. In some states, the use of such coinsurance
clauses is optional and must be accepted by the insured.
While 80% is the most commonly used coinsurance percentage,
alternative percentages are available. The insured may elect higher
percentages, for example, 90% or 100%. Most commercial property
rates are based upon the 80% coinsurance factor; thus if a higher
percentage is maintained (90% or 100%), rate credits are given. The
insured may elect a lower percentage but usually the increase in rate for
maintaining less than 80% is cost prohibitive and adversely affects
premium. Many insurers do not offer broad or special causes of loss (as
well as other property coverage enhancements) unless at least 80%
coinsurance is maintained.
How Much Coverage
Coinsurance Clause - While the Coinsurance clause is less widely used
than in previous years, it is still made part of many forms of insurance. In
some instances, insurance is offered with or without such a clause, with
acceptance at the option of the insured.
The rationale for the use of the co-insurance clause develops out of the
fact that most losses are partial. As a consequence, some property
owners are inclined to carry less insurance than is dictated by the value
of the property at risk, counting on the fact that a loss will be brought
under control before it has completely destroyed their property, while
more prudent property owners will carry insurance that more closely
reflects the value of the property at risk. Different insureds will then be
paying varying premiums, thereby contributing unevenly to the pool of
premiums from which all losses are paid.
Thus, assume that of two property owners, each carrying a stock worth
$300,000, owner number 1 insured his stock for $240,000; owner
number 2 elected to carry only $150,000 of insurance. Each sustains a
$60,000 loss and would be fully covered for the loss, although owner 1
has been paying twice the premium of owner 2.
To distribute the cost of insurance more equitably among all
policyholders, many forms contain a clause under which the insured
agrees to maintain insurance of not less than a given percentage of the
actual cash value of the property at the time of the loss. A reduced rate
is granted the insured on policies which include a clause of this kind. The
amount of the reduction increases with the percentage of coinsurance.
The form stipulates that the Coinsurance clause will be applicable only if
there is inserted in the Declarations a percentage figure under the
heading "Coinsurance."
The most commonly used percentage is 80%, although other
percentages are used. The general principle remains the same,
regardless of the particular percentage used.
Thus, under an 80% coinsurance clause, the insured agrees to carry
insurance of not less than 80% of the actual cash value (or replacement
cost, depending upon the valuation method covered in the policy) of the
property at the time of the loss. If the insured carries less than this
agreed percentage of insurance, he will not be entitled to collect in full for
a loss but will have to bear part of it. (The insured will be co-insuring the
risk together with the insurance company.) The company will be liable
only for such percentage of the loss as the amount of insurance carried
bears to 80% of the actual cash value of the property at the time of loss.
The percentage of loss for which the company is liable under these
circumstances may be expressed by the formula:
P x L = A
R
Where P is the amount of insurance Purchased, R is the amount of
insurance Required - the minimum coverage of the actual cash value of
the property stipulated at the time of the loss, L is the amount of the Loss,
A is the amount for which the company is liable.
EXAMPLE: Assume property worth $100,000 has been insured for
$40,000 in an insurance policy which contains an 80% coinsurance
clause. The insured suffers a $10,000 loss. The insurer is liable only for
one-half of the loss, as follows:
P amount of insurance purchased $40,000
R = amount of insurance required = $80,000 = ½ of the loss
Contrast the above situation with that of a second insured who complied
with the 80% Coinsurance clause in his policy and insured his stock of
$100,000 under a policy of $80,000. Again assuming a $40,000 loss, the
loss would be settled in full, as follows:
P Amount of Insurance Carried $80,000
R = Amount of Insurance Required = $80,000 = 100% of Loss
Often, actual appraisals of the value of the property are not made when
the policy is issued, depending upon the limits of insurance requested
and the underwriting philosophy of the insurer. Effort is often made,
however, by the company to ascertain whether the insured is living up to
his or her requirements under the Coinsurance clause. The method of
calculation of building limits and building cost estimators vary widely
between insurers. The expenses of an actual appraisal are usually
saved for large risks. In spite of the methods used by the underwriter,
the practical effects of the Coinsurance clause are felt only when the
loss occurs. At that time, the company determines whether the insured
has complied with the provisions of the Coinsurance clause and, if not, to
what extent he will have to bear a part of the loss.
The Coinsurance clause takes into account the actual cash value of the
property at the time of the loss. It is of no significance that the amount of
insurance may have been adequate when the policy was issued. If the
value of the property has increased, the insured is obligated to increase
the amount of insurance, in order to comply with the provisions of the
Coinsurance clause and to avoid being a coinsurer.
The insured never can collect more than the amount of the insurance.
Thus, in the first of the two examples given above, where the insured
carried $40,000 of insurance on stock worth $100,000 at the time of the
loss, and suffered a total loss of $100,000, he would collect no more
than $40,000---the amount of the policy.
The effect of the Coinsurance clause on an insured's recovery will be
the same whether he carries one or more policies on the property. Each
policy is liable only in the proportion that the amount of insurance in the
policy bears to the percentage stated of the actual cash value of the
property. Thus, in the first illustration used above, where the insured's
property was worth $100,000 if he carried two policies on the property
of $20,000 each, each policy would be liable for 1/4 of any loss. Both
policies together will be liable for 1/2 of any loss, the same result as
when there was only one policy of $40,000.
The Coinsurance clause percentage is not the maximum percentage of
any loss that the insured may collect. It is merely the minimum amount of
insurance which the insured must carry in order to, collect losses in full.
Any insured who maintains this required amount of insurance will collect
on any loss in full, up to the face amount of the policy. Furthermore, the
Coinsurance clause does not limit the amount of insurance that may be
carried. Any owner of property may carry 100%insurance to value. In
the event of a loss, the insured will be entitled to collect 100% of the
policy, if the loss is total.
Most states prohibit the use of coinsurance clauses on certain types of
property, most generally on dwellings and household contents. Other
states rule that policies containing such clauses must be clearly stamped;
others stipulate that the insured will be entitled to the refund of any
excess premium if it is found that he carried more insurance than the
value of his or her property. In some states, the use of such coinsurance
clauses is optional and must be accepted by the insured.
While 80% is the most commonly used coinsurance percentage,
alternative percentages are available. The insured may elect higher
percentages, for example, 90% or 100%. Most commercial property
rates are based upon the 80% coinsurance factor; thus if a higher
percentage is maintained (90% or 100%), rate credits are given. The
insured may elect a lower percentage but usually the increase in rate for
maintaining less than 80% is cost prohibitive and adversely affects
premium. Many insurers do not offer broad or special causes of loss (as
well as other property coverage enhancements) unless at least 80%
coinsurance is maintained.
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MY Insurance Agency
The materials on this page is meant to be
informative in nature. Due to the ever
changing and varying state laws, and the fact
some insurers offer coverage in slightly
different forms from the Insurance Services
Office (ISO) standard forms, we cannot
guarantee the accuracy of the materials on
this page.
informative in nature. Due to the ever
changing and varying state laws, and the fact
some insurers offer coverage in slightly
different forms from the Insurance Services
Office (ISO) standard forms, we cannot
guarantee the accuracy of the materials on
this page.