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COINSURANCE - ARE YOU REALLY COVERED?

By Bob Peppe


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Many of you are buying properties for pennies on the dollar these days, so how do you decide insurable value? If you don’t make the right decision, a nasty little clause in your policy called Coinsurance just might bite you where it really hurts – in your wallet.

Every property insurance policy has a coinsurance clause included which determines your claim payment in the event of a loss. If you insure your property for anything less than the replacement cost of the building – regardless of purchase price or loan amount – you are not properly covered. If you have a loss, your insurance company will factor in their coinsurance penalty against the amount that you would otherwise receive. For example:

In today’s market, you purchase a property way below what it would cost to build. You pay $800,000 and then insure for full purchase price. A fire takes place causing $250,000 damages and you make a claim. You’re fully covered minus your deductible, right? Wrong. The 80% coinsurance clause in your policy required that you insure your building for 80% of replacement value in order to avoid the coinsurance penalty. The insurance company determines that replacement cost for the entire building would have been $2 million, so according to the 80% coinsurance clause, you needed to have bought a $1.6 million policy in order to avoid a coinsurance penalty. You only have half of the coinsurance requirement - $800,000/$1.6 million = 50%. Thus you will receive 50% of the $250,000 minus the $5000 deductible. You receive $120,000 against $250,000 damage. So you’re out $130,000.

If you had insured for $1.6 million the insurance company would have covered 100% of the loss minus deductible up to a limit of $1.6 million.

To determine a realistic replacement value of a property, you can either obtain an appraisal or have your insurance agent do a replacement cost estimator – which is based on several factors, including age and construction type of your building.

Coinsurance can be tricky and cost you a lot of money and grief if you under-insure your property. Be prudent and prosper.

Bob Peppe – Pelican Insurance – (800)724-9443

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